Fitch Ratings affirmed South Korea’s credit rating at ‘AA-‘ on Tuesday, with stable outlook, citing a balance between a strong macroeconomic environment and robust external finances, and geopolitical risk due to tensions with North Korea and low per capita GDP compared with its peers.
The long-term foreign currency issuer default rating was affirmed at ‘AA-‘ and long-term local currency IDR at ‘AA’. The outlooks on the long-term IDRs are stable, the agency said.
Fitch said the country’s strong economic performance is challenged in the longer run by fast population ageing and low productivity growth. The agency expects GDP growth to accelerate gradually to 2.7 percent this year, from 2.6 percent last year, and to 3.0 percent in 2017 due to a slight pick-up in external demand.
Inflation, which has been beyond the target range since October 2012, was forecast to average 1.5 percent this year and 1.9 percent in 2017. The reduction of the inflation target to 2 percent from the 2.5-3.5 percent improves the likelihood of inflation close to the target, which could improve the future credibility of monetary policy, Fitch noted.
Thanks to a persistent current account surplus, high foreign-exchange reserves and a net external asset position, South Korea faces relatively limited external refinancing risk, such as those emanating from further Fed policy normalization.
“The Korean economy is vulnerable, nonetheless, to an external demand shock, eg in the context of a more severe slowdown of the Chinese economy than expected,” Fitch said.
Drawing attention to South Korea’s high household debt, close to 90 percent of GDP and rising, Fitch said this seems to limit policy flexibility in particular, as it appears to constrain the Bank of Korea from further loosening its monetary policy stance.
A convincing strategy to reduce the broader public debt burden and evidence that the economy can grow at a relatively high rate over time without eroding the aggregate household balance sheet can trigger positive rating action, the agency added.
The material has been provided by InstaForex Company – www.instaforex.com