MARC has affirmed South Korea’s foreign currency sovereign rating of AAA with a stable outlook based on the rating agency’s 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, without respect to specific securities or payment obligations. 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 government of South Korea (GoK) has no debt rated by MARC.

The rating portrays South Korea’s sound macroeconomic fundamentals, underpinned by its status as a well-diversified advanced economy. From once being one of the poorest nations, multiple economic reforms have successfully transformed the economy into the world’s 34th wealthiest and 11th largest economy in just one generation. Its gross domestic product (GDP) per capita on a purchasing power parity (PPP) basis stood at USD37,730 in 2016, an increase by fivefold since 1990. As a highly open economy, South Korea was one of the few advanced economies that avoided the Global Financial Crisis (GFC) in 2009 and recorded 18 successive years of economic growth since the Asian Financial Crisis (AFC). This resiliency reflects the significant diversification of its economy, supported by a highly competitive industrial and manufacturing base. While economic growth has slowed somewhat in the post-GFC period, averaging 3.5% per annum, its performance fared relatively better than the 2.1% annual pace for the Organisation for Economic Co-operation and Development (OECD) countries as a whole.

Also underpinning the rating is the country’s remarkably strong external balance sheet. The current account (CA) surplus of the balance of payments is large by advanced countries’ norms and its status as a net creditor nation as well as ample foreign exchange reserves further limit the country’s susceptibility to exogenous shocks. Notably, over the past seven years, South Korea’s CA surplus averaged at 5.0% of GDP, substantially stronger than the 1.1% of GDP for OECD countries. The economy’s net international investment position (IIP) which turned positive in 2014 has continued to improve, standing at a record 19.7% of GDP in 2016. Its high level of international reserves, at 3.5 times of short-term external debt, combined with the country’s floating exchange rate regime would enable the economy to weather any possible massive outflows of capital over the near to medium term.

South Korea’s history of sound fiscal management acts as another strong factor in overall creditworthiness. Save for 2009 during the GFC, the country had enjoyed 16 consecutive years of fiscal surpluses, averaging at 1.2% of GDP. Notably, the debt level has been relatively low by global benchmarks (2016: 36.1% of GDP), despite its increasing trend in recent years. While the government remains committed to a fiscal expansionary stance in the short to medium term, MARC foresees South Korea’s fiscal soundness to be well preserved. Evidently, past fiscal prudence has enabled the government to pre-emptively introduce countercyclical measures to support the economy against a series of domestic and external shocks. Given the considerable fiscal space, the government has ample policy flexibility to actively support growth in the near to medium term.

The rating also takes into account the country’s structural issues that weigh on its long-term economic potential. The population is rapidly ageing, while labour productivity is lagging, particularly in the non-tradeable sector. It is important to note that an ageing population bears a significant implication on growth, inflation, CA and fiscal balances. Not surprisingly, the International Monetary Fund (IMF) estimates that South Korea’s potential growth has shrunk considerably, from as high as 8.0% in 1991 to 2.9% in 2015, due to falling contributions from labour, capital inputs and productivity. On these, MARC views the authorities’ strong commitment to structural reforms as credit positive. While some of the reform measures resulted in limited progress due to continued political gridlock, past experience of successful economic reforms suggests 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 anticipated to remain favourable, persistent geopolitical risks remain a primary weakness in the overall credit assessment. Notwithstanding this, MARC feels that an outright military conflict will likely be averted, in view of its adverse impact, be it global or regional. Indeed, any persistent provocations by the Northern regime will likely result in greater financial and economic sanctions by the United Nations and other major economies, something which we believe the North Korean leader will try to avoid over the longer term. In this regard, a reunification between South and North Korea remains highly unlikely, although a smooth and peaceful reconciliation over the longer term will benefit the 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 maintaining resilient economic growth, in view of pockets of uncertainties prevailing in the global economy. The outlook is also based on our assumption that the structural reforms will not be hampered by rising geopolitical risk. That said, MARC deems this an event risk, and should there be an escalation in cross-border tensions that could possibly lead to weaker macroeconomic fundamentals, it could lead to a credit rating action.

Contacts:
Afiq Akmal Mohamad, +603-2717 2942/ afiq@marc.com.my;
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my;