February 2, 2016 / 9:58 AM / in 2 years

Fitch Affirms Korea at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, February 02 (Fitch) Fitch Ratings has affirmed Korea's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'AA-' and Long-Term Local Currency IDR at 'AA'. 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 Fitch's affirmation of Korea's sovereign ratings and Stable Outlook balances a strong macroeconomic environment and robust external finances, with geopolitical risk related to the tense relationship with North-Korea and low per capita GDP compared with its peers. Korea's macroeconomic performance is strong, even though it is challenged in the longer run by fast population ageing and low productivity growth. Real GDP growth came down to 2.6% in 2015 from 3.3% in 2014, resulting from a drop in the growth contribution of exports and domestic confidence after the outbreak of Middle East Respiratory Syndrome (MERS). Fitch expects GDP growth to accelerate gradually to 2.7% in 2016 and 3.0% in 2017 due to a slight pick-up in external demand, and headline inflation to average 1.5% in 2016 and 1.9% in 2017. The reduction of the inflation target to 2% from the 2.5%-3.5% range improves the likelihood of inflation close to the target, which could improve the future credibility of monetary policy. Inflation has not been within the target range since October 2012. Robust external finances are illustrated by a persistent current account surplus (7.8% of GDP in 2015), high foreign-exchange reserves and a net external asset position. This implies relatively limited external refinancing risk, eg emanating from further Fed policy normalisation. 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. Domestic demand has become a more important growth driver in the development process over the years, but exports remain key for the small open economy. Korea's government policies are aimed at supporting domestic demand through public spending and structural reforms, and stimulating consumer sectors that potentially benefit from a rebalancing in China from investment-led growth to a more consumer-based economy. The fourth nuclear test by North Korea on 6 January 2016, and heightened tensions in August 2015 resulting in the exchange of artillery fire across the Demilitarised Zone, illustrate the geopolitical risk of the longstanding conflict on the Korean peninsula that continues to weigh on the rating. Uncertainties are exacerbated by the opacity of the North Korean regime's policies. Risks to the sovereign balance sheet and the economy relate to both the short- to medium-term risk of increased tensions and a long-term scenario of reunification. However, reunification would also provide opportunities in terms of political stability and relatively cheap labour during a transition period of integration for manufacturing export-led growth. Per capita income at USD27,215 in 2015 is one of the lowest in the 'AA' category (the median is USD42,513). However, Korea is more developed than the income level would suggest. The country is ranked fourth out of 189 countries for the World Bank's Ease of Doing Business indicator, but scores below the 'AA' median for its Governance indicator (73rd percentile versus 78th percentile). Household debt is high at close to 90% of GDP and continues to rise, increasing Korea's vulnerability to shocks, although household assets are also relatively high - which limits the risk to financial stability and the economy to some extent. The authorities are taking measures to reduce the weaknesses related to household debt, eg by stimulating conversion of mortgage debt into longer maturities and at fixed rates. The high household debt seems to limit policy flexibility in particular, as it appears to constrain the Bank of Korea from further loosening its monetary policy stance. General government debt, estimated by Fitch at 36.9% of GDP in 2015, is close to the 'AA' peer median of 36.0%. Fitch estimates the consolidated central government balance (including social security) to fall to -0.3% of GDP as a result of fiscal stimulus of the supplementary budget. The government balance had been in surplus since 2000 - except in 2009, during the global financial crisis. The debt held by state-owned enterprises fell to 35.1% in 2014 from 36.4% in 2013, and the government's resolve to rein in the debt further is positive from a credit perspective. RATING SENSITIVITIES The main factors that, individually or collectively, could trigger positive rating action are: - A convincing strategy to reduce the broader public debt burden, which would be reflected in lower debt to GDP ratios for the general government and state-linked enterprises. - Evidence that the economy can grow at a relatively high rate over time, thereby narrowing the per-capita income gap with rating peers, without deterioration in the aggregate household balance sheet. The main factors that, individually or collectively, could trigger negative rating action are: - An unexpected large rise in the public-sector debt burden caused by a deviation from the current prudent fiscal policy framework or crystallisation of financial sector or other contingent liabilities. - Evidence that GDP growth will be structurally lower than expected, potentially reflecting medium- to long-term challenges for Korea's economic model. KEY ASSUMPTIONS - No significant change in the relationship between North and South Korea, such as a full-scale military conflict, or the sudden collapse of the regime in the North leading to instability on the Korean peninsula. - The global economy performs broadly in line with Fitch's Global Economic Outlook, with a slight rise in global real GDP growth to 2.6% in 2016 and 2.7% in 2017, up from 2.3% in 2015 and a gradual slowdown of growth in China to 6% by 2017. Contact:: Primary Analyst Thomas Rookmaaker Director +852 2263 9891 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Andrew Fennell Associate Director +852 2263 9925 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 20 Aug 2015) here Sovereign Rating Criteria (pub. 12 Aug 2014) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=998860 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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