REPUBLIC OF KOREA - 2019

MARC has affirmed the Republic of Korea’s (South Korea) foreign currency sovereign rating of AAA with a stable outlook based on MARC’s national rating scale. The AAA rating reflects South Korea’s steady economic performance, prudent fiscal management and strong external position. Its strengths are, however, tempered by a rapidly ageing population and rising geopolitical risk. The stable outlook is based on expectation 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 still unresolved US-China trade spat, persistent North Korea risk and escalation of South Korea-Japan tensions.

South Korea’s economic performance remains steady, thanks to strong fundamentals underpinned by a competitive industrial and manufacturing base. With strong human capital, sound institutions and economic policies, it remains one of the fastest-growing advanced economies. Over the 1990-2018 period, South Korea’s GDP per capita had risen by 216%. It is internationally competitive; in the 2018 edition of the World Economic Forum’s Global Competitiveness Index 4.0, it was ranked at number 15 out of 140 economies.

Its impressive track record of fiscal prudence remains key to the country’s macroeconomic stability. The government’s revenue growth continues to outpace that of expenditure and the fiscal balance has been consistently in the black. Over the 2012-2018 period, the fiscal surplus had averaged 0.9% of GDP. South Korea’s fiscal position, given its prudent fiscal management, is among the soundest in the club of rich countries. Debt remains relatively low, and the government is a net creditor with assets larger than liabilities.

South Korea’s external balance sheet continues to be strong and the country remains a net international creditor. In 2018, its current account balance came in at 4.7% of GDP despite elevated global trade tensions. The most recently available data show the current account surplus reaching nearly USD7.0 billion in July, the biggest since October last year, thanks to increased income from investment in overseas securities. South Korea’s net international investment position stands at over 20% of GDP. Meanwhile, its foreign reserve holdings, amounting to slightly above USD400 billion, rank among the top 10 largest in the world.

The country’s rapidly ageing population is a rating constraint. As the percentage of over-65s in the population has already exceeded 14%, it is officially an “aged” society. It is important to note that the population of productive age, i.e. between 15 and 64, fell for the first time ever in 2017. With “workforce ageing” – the shifting of the workforce composition from relatively young to relatively old workers – on an accelerating trend, the expected long-term impact on labour productivity, and consequently economic growth and fiscal health will be tremendous.

Also weighing on South Korea’s sovereign credit rating is geopolitical tensions on the Korean peninsula, especially with North Korea historically never sticking to any of its agreements. In late July, the latter resumed testing short-range missiles, likely in response to the perception that the US alliance network in the region is weakening as South Korea-Japan tensions worsen. Seoul’s decision not to renew a vital bilateral intelligence-sharing pact with Tokyo is expected to make trilateral cooperation with Washington less efficient and hurt regional security.

Major Rating Factors

Strengths

• Steady economic performance;
• Prudent fiscal management; and
• Strong external position.

Challenges/Risks

• Rapidly ageing population; and
• Rising geopolitical risk.