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(2nd LD) Moody's keeps 'Aa2' rating on S. Korea with stable outlook

Economy 17:54 May 19, 2023

(ATTN: RECASTS headline; UPDATES with details throughout)
By Kang Yoon-seung

SEOUL, May 19 (Yonhap) -- Global credit appraiser Moody's Investors Service said Friday it has affirmed its "Aa2" credit rating on South Korea with a stable outlook on the back of its strong policy effectiveness and competitive economy.

Moody's has been maintaining South Korea's sovereign credit rating at "Aa2," the third-highest level on the company's table, since December 2015.

The credit appraiser also expected Asia's No. 4 economy to expand 1.5 percent in 2023, down 1 percentage point from the previous report. The outlook comes in line with the state-run Korea Development Institute's estimate released last week.

"The credit profile of Korea is underpinned by its strong policy effectiveness, and highly diversified and competitive economy. External buffers remain healthy, while the government's fiscal consolidation goals will keep debt levels in line with advanced economy medians," the appraiser said.

The company added the direct impact of U.S. bank failures on South Korea has been "limited."

Moody's, however, noted South Korea's weak chip exports may weigh down on the growth as well.

South Korea's exports fell for the seventh consecutive month in April due mainly to sagging global demand for semiconductors. Outbound shipments of chips plunged 41 percent on-year amid the downcycle of the industry.

"Tighter financial conditions, the housing market downturn and weak labor markets can amplify weaker growth, with higher interest rates and fluctuating asset prices presenting risks for vulnerable households," it added.

The Bank of Korea had raised borrowing costs seven straight times to tackle inflation before freezing its key rate at 3.5 percent in February.

Moody's added geopolitical risks, such as inter-Korean tensions, are considered factors that could prompt a downgrade of Korea's sovereign rating.

"Other factors that could trigger a rating downgrade include deeper and more sustained economic damage from global or domestic shocks that severely impairs potential growth or a significant deterioration in Korea's fiscal strength, or both," it added.

On the other hand, Moody's said South Korea's rating may be upgraded if it addresses the fallout of its aging population.

The remark came as government data showed earlier that the number of babies born in South Korea dropped to yet another record low level in February. Deaths, meanwhile, continued to outpace births, a trend that has been continuing since 2020.

The credit appraiser, meanwhile, noted South Korea's plan to adopt a new fiscal rule will "support overall fiscal sustainability" and "improve fiscal policy independence and effectiveness."

South Korea has been seeking to enforce tighter fiscal rules that center on capping the deficit to 3 percent of the country's gross domestic product (GDP).

South Korea's finance ministry said it plans to continue to closely communicate with global credit appraisers and ensure the government's efforts to address the population crisis and maintain stability of its financial market.

(2nd LD) Moody's keeps 'Aa2' rating on S. Korea with stable outlook - 1


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