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 AAA rating reflects South Korea’s steady economic performance, prudent fiscal management and strong external position. Meanwhile, a rapidly ageing population and rising geopolitical risk remain concerns.

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. It is internationally competitive, as evidenced by its ranking at number 15 out of 140 economies in the 2018 edition of the World Economic Forum’s Global Competitiveness Index 4.0.

Its impressive track record of fiscal prudence remains key to macroeconomic stability. Government 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 is among the soundest in the club of rich countries. Debt remains relatively low, and the government has more assets than liabilities.

South Korea’s external balance sheet continues to be strong. In 2018, its current account balance came in at 4.7% of GDP despite elevated global trade tensions. Thanks to persistent surpluses, it is a net international creditor with a net international investment position equivalent to over 20% of GDP. Meanwhile, its foreign reserve holdings, standing at over 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. 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 rising geopolitical risk. In late July, North Korea had resumed testing short-range missiles. Given worsening South Korea-Japan tensions, North Korea’s move is seen as a response to the perception that the US alliance network in the region is weakening. The perception is not misplaced because Seoul has decided not to renew a vital bilateral intelligence-sharing pact with Tokyo. This, we believe, could hurt regional security.

The stable outlook for South Korea is based on expectation of continued pragmatic and effective policy-making with no sudden erosion of its considerable fiscal and external buffers. We are, nevertheless, cautious on the outlook because of the US-China trade spat and rising regional tensions.

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