FW: MARC AFFIRMS SOUTH KOREA’S SOVEREIGN RATING AT AAA

 

 

P R E S S  A N N O U N C E M E N T

 

FOR IMMEDIATE RELEASE

 

MARC AFFIRMS SOUTH KOREA'S SOVEREIGN RATING AT AAA

 

MARC has affirmed its public information foreign currency sovereign rating of AAA/stable on the Republic of Korea (South Korea), based on its national rating scale. The rating reflects South Korea's economic resilience, sound fiscal position and strong external position. Its rating strengths are, however, tempered by its rapidly ageing population and geopolitical risk stemming from North Korea. South Korea's stable outlook is based on expectations of continued pragmatic and effective policy-making, and that there is no sudden erosion of its considerable fiscal and external buffers. We are, nevertheless, cautious on the outlook because of the ongoing US-China trade spat and geopolitical risk stemming from the unpredictability of the North Korean regime.

 

The South Korean economy remains resilient to global shocks, thanks to strong macroeconomic fundamentals. Gross domestic product (GDP) growth in 2018 will likely come in at slightly below 3% because of elevated global trade tensions. The government's "income-led growth" strategy should support domestic demand. Going forward, economic potential should improve as the government implements supply-side policies to boost innovation.

 

A strong record of fiscal prudence has led to a sound fiscal position. Given the new administration's expansionary fiscal policy and welfare spending, South Korea's fiscal balance is expected to fall into a deficit of 1.7% of GDP in 2018. The government, a net creditor, has reserves equivalent to about 30% of GDP. As of end-3Q2017, government debt stood at a relatively low 36.7% of GDP.

 

Thanks to persistent current account surpluses, South Korea has built up a strong external position. Its foreign exchange reserves as of end-July 2018 stood at USD402.4 billion. With a net international investment position equivalent to 16.2% of GDP (end-2017), it is a net international creditor. It is not surprising then that capital flows have proven relatively resilient despite US monetary tightening and geopolitical tensions.

 

A rapidly ageing population continues to weigh on South Korea's sovereign credit rating. Over the 1997-2017 period, the proportion of those aged 65 or over more than doubled to 13.9% from 6.4%. The impact on economic growth, productivity and fiscal cost going forward is a credit concern. Meanwhile, inadequate social protection, which is creating poverty among the elderly, has affected consumption spending.

 

With the Korean Peninsula remaining in a technical state of war, and the US and North Korea at times engaging in "belligerent rhetoric," geopolitical tensions have never been far away. Against this backdrop, there is always the possibility of an unexpected event triggering a military confrontation. Even if that does not happen, rising tensions have the potential to negatively affect consumer and business sentiment, with implications for economic growth.

 

 

Contacts: Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my; Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my

 

September 21, 2018

 

[This announcement is available in MARC's corporate homepage at http://www.marc.com.my]

----   DISCLAIMER    ----

This communication is provided by Malaysian Rating Corporation Berhad (MARC) on the basis of information believed by MARC to be accurate and reliable as derived from publicly available sources or provided by the rated entity or its agents. MARC, however, has not independently verified such information and makes no representation as to the accuracy or completeness of such information. Any assignment of a credit rating by MARC is solely to be construed as a statement of its opinion and not a statement of fact. A credit rating is not a recommendation to buy, sell, or hold any security.

 

© 2018 Malaysian Rating Corporation Berhad

 

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