Thursday, Dec 22, 2016

MARC has affirmed South Korea’s foreign currency sovereign rating of AAA with a stable outlook based on its national rating scale. The rating reflects MARC’s opinion of the sovereign’s ability to meet its foreign currency obligations in full and on time. The government of South Korea (GoK) has no debt rated by MARC. The rating also serves as a country ceiling for ringgit-denominated debt issued locally by issuers domiciled in South Korea. Transfer and convertibility (T&C) risks are reflected in the country ceiling. The analysis is based solely on information available in the public domain.

The rating reflects South Korea’s solid macroeconomic fundamentals, supported by a high-income, well-diversified economy; exceptionally robust external balance sheet; and prudent fiscal management. The rating also takes into consideration South Korea’s array of structural challenges, as well as persistent geopolitical concerns.

South Korea’s overall credit strength is underpinned by its status as a high income, well-diversified economy. Its gross domestic product (GDP) per capita on a purchasing power parity (PPP) basis stood at USD36,612 in 2015, a nearly fivefold increase since 1990, and it is ranked as the 33rd wealthiest nation in the world. The economy has been resilient in the face of domestic and global headwinds, thanks to the significant diversification of its economy alongside its highly competitive industrial and manufacturing base. The economy enjoyed uninterrupted economic growth for 17 successive years and has weathered the Global Financial Crisis (GFC) effectively. It managed to post a positive growth, albeit at a slower pace of 0.7% in 2009 (2008: 2.8%). While average economic growth has slowed somewhat in the post-GFC period (3.6%), its performance fared relatively better than its Organisation for Economic Co-operation and Development (OECD) peers which averaged at 1.9% in the six-year period through to 2015.

Also supporting the rating is the country’s exceptionally robust external balance sheet. Its current account (CA) balance remained in surplus for 18 consecutive years and improved further to a 17-year high of 7.7% of GDP in 2015 (2014: 6.0%). This was in spite of weakening global trade, as persistently low global oil prices have helped improve its terms of trade. Its positive net international investment position (IIP) of 14.2% of GDP in 2015 further reinforces its status as a net creditor nation. Moreover, we are comforted by the continued improvement in the external debt profile in recent years, as modestly low short-term obligations are more than matched by even larger short-term external assets (2015: 4.8 times, 2014: 4.4 times). Its high level of international reserves (3.4 times of short-term external debt and ranked the sixth-largest in the world), along with the country’s floating exchange rate regime, should act as an important cushion against renewed global financial market turmoil over the near term.

South Korea’s rating is also anchored by its prudent fiscal management on the back of sustained fiscal surpluses since the new millennium, save for 2009 during the GFC. While the government has pledged to adopt expansionary fiscal policies in the short to medium term, we do not foresee South Korea’s fiscal soundness to be materially impacted, as past fiscal prudence would enable the government to introduce countercyclical measures to support the economy. We are of the view that its fiscal condition will remain broadly manageable and improve gradually, in accordance to its medium-term fiscal management plan. In addition, the proposal to enact the fiscal soundness law will further enhance its already credible fiscal management framework. While we foresee the government debt level to continue rising to around 40% of GDP over the near to medium term, it will remain sharply lower than that of other developed economies (OECD’s average: 71.7% of GDP in 2015). More importantly, the bulk of the borrowings were from domestic sources, thereby limiting its exposure to foreign currency risk.

Although the economy remained relatively resilient, the prospects over the medium to longer term have been clouded by an array of structural challenges arising from, among other things, a rapidly aging population, lagging productivity, and rising corporate vulnerabilities. The International Monetary Fund (IMF) estimates that South Korea’s potential economic growth has fallen to below 3.0% in 2015 from 7.0%-8.0% in the early 1990s, due largely to declining contributions from labour, capital inputs and productivity. Notwithstanding this, MARC views the authorities’ strong commitment on structural reforms as a credit positive. While some of the measures experienced limited progress due to the recent political gridlock, past experience of successful economic reforms suggest that the authorities would be able to sustain and improve the growth performance over the medium to longer term.

While South Korea’s major institutional rankings are expected to remain favourable in the near to medium term, geopolitical issues are a concern in the overall credit assessment. This is in view of its longstanding conflict with the North Korean regime which could destabilise the economy in the event of a serious escalation of tension. Although the likelihood of a reunification between South and North Korea remains relatively low at this juncture, a smooth and peaceful reconciliation over the longer term will benefit the South Korean economy through greater access to cheap labour and investment opportunities, despite large initial fiscal costs.

The stable outlook reflects MARC’s expectations that the authorities will remain proactive in dealing with different market pressures, in light of stubbornly weak domestic demand as well as the increasing uncertainties prevailing in the global economy. The outlook is also based on our assumption that the structural reforms to revive the sluggish economy will not be hampered by politics.

Afiq Akmal Mohamad, +603-2082 2274/;
Quah Boon Huat, +603-2082 2231/;
Nor Zahidi Alias, +603-2082 2277/