Fitch Affirms Korea at 'AA-'; Outlook Stable

Tue Aug 19, 2014 6:12am EDT

(The following statement was released by the rating agency) HONG KONG, August 19 (Fitch) Fitch Ratings has affirmed Korea's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AA-' and 'AA' respectively. The issue ratings on Korea's senior unsecured Foreign- and Local-Currency bonds are also affirmed at 'AA-' and 'AA' respectively. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'AA+' and the Short-Term Foreign-Currency IDR at 'F1+'. KEY RATING DRIVERS The affirmation of Korea's IDRs reflects the following key rating drivers:- -Korea's macroeconomic performance is credit-supportive. Growth remains broadly resilient notwithstanding a slowdown in 2Q 2014 following a shock to consumer confidence from the Sewol ferry disaster. Five-year average GDP growth of 3.8% per year (2010-2014) exceeds the 'AA' range median of 3.3% as well as the 'A' median of 3.5%. Growth and inflation are less volatile than peer medians. Fitch expects real GDP growth of 3.7% in 2014, rising to 3.9% in 2015. Growth prospects are supported by the economy's high investment rate (29% in 2013). -Moderate government debt and sustained budget surpluses support the ratings. Korea's consolidated central government (CG) budget has been in surplus each year since 2000, barring only 2009. The government projects the social security system to remain in surplus until 2030. -CG debt was 34.8% of GDP at end-2013. This was not far off the median for general government (GG) debt for 'AA' rated countries of 36.5%. The authorities have released a figure for consolidated GG debt of 36.6% of GDP for end-2012, up from 34.4% at end-2011. The end-2012 figure is not materially different, from a credit perspective, from the CG debt figure of 33.2%. -The authorities have begun to tackle the issue of broader public sector indebtedness, including through the release of additional information since February 2014. Consolidated public sector debt was 59.6% of GDP at end-2012, up from 56.5% at end-2011. (End-2013 data will become available only in December.) The authorities have set out a financial management plan for state-owned enterprises through to 2017 that is supposed to see the sector's debt peak in cash terms in 2015. -Korea's external finances continue to strengthen, underpinned by a run of current account surpluses back to 1998. Korea's net external creditor position is projected to strengthen to 16.8% of GDP by end-2014 from 13.9% at end-2013, driven by a current account surplus of 5.9% of GDP in 2014. The banking sector has significantly reduced its net external indebtedness to USD39.2bn at end-2013, from a peak of USD118.9bn at end-2007. Fitch estimates external debt maturities at about USD82bn in 2014 (of which USD21bn is sovereign), against foreign reserves of USD368bn at end-July 2014. -Relatively high and rising household indebtedness increases Korea's vulnerability to an economic shock and is a weakness in the sovereign credit profile. Household debt reached 84.6% of GDP at end-2013, up from 83.5% at end-2012. The authorities have set a policy goal of reducing the debt by 5 percentage points (pp) as a share of disposable income to 155.7% by end-2017 from 160.7% at end-2013. -Exposure to geopolitical risk is a weakness in Korea's credit profile relative to peers owing to risks associated with North Korea. The (South) Korean government's assessment is that the North Korean economy has strengthened since 2011 and that Kim Jong-un has consolidated his position as leader. This may suggest the risks of a collapse of the North Korean regime have diminished in the near term. However, North Korea is extremely opaque and there is a high degree of uncertainty attached to any assessment of conditions there. -Korea's average income level of USD26,000 in 2013 was the lowest in the 'AA' category. Set against this weakness, the country's broader level of human development and its business environment compare favourably against 'AA' and 'A' range peer medians. RATING SENSITIVITIES The main factors that, individually or collectively, could trigger positive rating action are: -A significant reduction in general government indebtedness -A sustainable decrease over time in the indebtedness of state-linked enterprises -Evidence that the economy can grow over time, thereby narrowing the income gap with rating peers, without an ongoing rise in household indebtedness The main factors that, individually or collectively, could trigger negative rating action are: -A change of policy on the broader public sector's finances leading to tolerance for sustained rises in GG or broader public sector debt -Crystallisation of risks in the financial sector leading to disruption of economic and financial stability, such as a sharp pick-up in defaults among households KEY ASSUMPTIONS The global economy develops broadly in line with the projections contained in Fitch's June "Global Economic Outlook". In particular, the ratings assume China's economic growth does not decelerate into the low single digit range for a sustained period. No significant change in the relationship between North and South Korea, such as a full-scale military conflict, or the sudden collapse of the North leading to large unification costs for the South. Contact: Primary Analyst Andrew Colquhoun Senior Director +852 2263 9938 Fitch Ratings (Hong Kong) Ltd. 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Thomas Rookmaaker Director +852 2263 9891 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. 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