RPT-Fitch affirms Korea at 'AA-'/'AA'; stable outlook
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Aug 22 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Korea's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AA-' and 'AA' respectively. The Outlooks are Stable. The agency also affirmed the Short-Term Foreign-Currency IDR at 'F1+' and Country Ceiling at 'AA+'.
KEY RATING DRIVERS
The affirmation of the ratings reflects the following factors:
- Korea's fundamental strengths, which include a resilient economy and a robust macroeconomic policy framework including sustained fiscal discipline and a flexible exchange rate, remain intact. These factors leave Korea well-positioned to cope with the risks of high household debt, and a volatile global economic and financial environment.
- The economy remains resilient as real GDP grew 2.3% yoy (or 4.5% on a seasonally adjusted annualised rate) in Q213, from 1.5% yoy in Q113. Fitch believes Korea's H113 performance highlights the Japanese yen's weakness is unlikely to severely undermine or reverse the improved competiveness of the export sector and the overall economy. As a consequence, Fitch forecasts that Korea's real GDP will grow 2.6% in 2013 and 3.4% in 2014, up from 2% in 2012.
- Korea's external finances have strengthened. The economy and the banking sector are in a stronger position to cope with global risk aversion than they were during the 2008-2010 global financial crisis. Short-term external debt fell to 29.1% of total external debt in Q213 (versus a peak of 51.9% in Q308) as banks have lengthened the maturity of their foreign borrowings. The sovereign also has a strong external balance sheet due to large foreign-exchange reserves
- USD329.7bn at the end-July 2013. Korea's current account remains in surplus; Fitch estimates it rose to 5.2% of GDP in H113 (versus 2.5% in H112).
- Household debt remains high and weighs on Korea's credit profile. The household debt/disposable income ratio rose to 164% in 2012, which is high compared with other advanced economies including the United States (114%), Japan (123%), and New Zealand (143%). However, Fitch views Korea's macroeconomic resilience and policy flexibility as a buffer against risks to household balance sheets compared with other economies.
- The government also faces potential risks from state-owned enterprises (SOEs). The government's contingent liabilities have risen because of increasing debt of the country's 30 state-owned enterprises (SOEs). Their combined debt rose to 30.9% of GDP in 2012 (22.4% in 2009). However, the new government has signalled its intent to contain the growth of SOE debt by increasing public tariffs, allowing greater private-sector participation and scaling back overseas investment by SOEs.
- Geopolitical risks have re-emerged due to increased provocation by North Korea (eg. nuclear test and rocket launch) in H113. However, Fitch believes that the risk of a regime collapse or military escalation in North Korea remains remote. Risks associated with North Korea remain relevant, but in Fitch's view are not inconsistent with the sovereign's current ratings.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well-balanced. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.
The main factors that individually, or collectively, could trigger positive rating action:
- A material reduction in the general government debt/GDP ratio
- A further sustained reduction in the vulnerability of the banking sector, for example by continuing to reduce the reliance on short-term external financing
- A decline in the sovereign's contingent liabilities (eg, lower state-owned enterprise debt)
The main factors that individually, or collectively, could trigger negative rating action:
- A sharp deterioration in the banking sector's funding position or asset quality, leading to a need for sovereign support
- A household debt crisis, which impacts the economy through either a sharp decline in private consumption or a sharp rise in non-performing loans in the banking system and, consequently, leading to a deterioration in the sovereign's fiscal position
- A decline in the economy's potential growth rate of 3.5%-4%, leading to significantly higher unemployment or broader economic and financial instability
- No significant changes in the relationship between North and South Korea, particularly a military conflict with or a sudden collapse of North Korea (leading to reunification costs for the South)
- No severe disruption to global financial stability that could lead to a sudden stop in capital flows
- Crude oil prices do not diverge significantly from Fitch's base case projection of USD100 per barrel over 2014-2015
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