Moody's upgrades South Korea's ratings
Hong Kong, July 25, 2007 -- Moody's Investors Service upgraded South Korea's government bond ratings to A2 from A3. The rating agency attributed the upgrade to Korea's track record of fiscal prudence, favorable macroeconomic performance, and the containment of geopolitical risks.
Moody's rating action raised the Republic of Korea's government long-term foreign-currency and local-currency ratings to A2 from A3, the country ceiling for foreign-currency bonds to Aa3 from A1, the country ceiling for foreign-currency bank deposits to A2 from A3, and the short-term ceiling for foreign currency bank deposits to P-1 from P-2. The local-currency bond and bank deposit ceilings remain Aaa and Aa1, respectively. The outlook on the ratings is stable.
"Korea's favorable macroeconomic performance will likely continue over the near term," said Moody's Senior Vice President Thomas Byrne. "Over the longer term, Korea's credit fundamentals should be strengthened by a renewed commitment to trade and financial sector and capital market liberalization, which should help enhance the country's competitiveness, improve consumer welfare and boost potential economic growth."
Byrne said the rise in government debt in recent years was mainly caused by the government intervention in the foreign exchange market and by fiscalization of contingent financial-sector liabilities from the regional financial crisis of 1997.
"Current policies, including minimal intervention in the foreign exchange market, will allow a gradual decline in government debt," said Byrne. "The government has so far managed to accommodate rising costs from social welfare demands and engagement with North Korea without exerting much pressure on the budget, as is reflected in consistent budget surpluses since 2000."
On the external front, he said, a substantial buildup in official foreign exchange reserves provides a fair amount of insulation from external shocks, which is of renewed importance in light of the rise in Korea's short-term external debt. The growth in short-term liabilities of the banking sector has led to some slippage in Korea's external liquidity indicators, although Korea's overall external payments position remains in a sound position. Such strength is also reflected in the emergence of several globally competitive industries which have contributed to robust export performance and are likely to help support Korea's external as well as domestic economic performance.
"Unfolding developments involving the implementation of February's six-party agreement should allay some concerns over geopolitical risks associated with North Korea, which are incorporated in South Korea's ratings," said Byrne. "Foremost has been the threat posed by North Korea's nuclear weapons program to regional security and to risks of proliferation of nuclear materials, which could lead to a re-escalation of military tensions on the Korean peninsula."
As long as there is a viable framework for containing such geopolitical risks, he said, Moody's considers the future fiscal cost of engagement with North Korea to be manageable at this stage of developments and consistent with South Korea's ratings.
"However, there could possibly be much larger costs to South Korea under a 'Marshall Plan' for the North should there be a collapse or a radical change in policy of the Pyongyang government," said Byrne. "But that burden could be shared to some extent among the regional powers if the North were to engage the international community constructively and reform its economic, political, and foreign policies."
Whatever scenario unfolds, he said, "a cohesive approach by the five governments negotiating with North Korea seems essential for optimal political and economic outcomes."
Byrne said that for Korea's rating to move up further, Moody's would look for the government to reduce its debt ratios. Other factors that will influence the future rating trajectory are the maintenance of a strong external payments position, including a containment of short-term external liabilities, and the sustainability of Korea's favorable macroeconomic performance.
Press releases of other ratings affected by this action will follow separately.
Hong Kong, July 25, 2007 -- Moody's Investors Service upgraded South Korea's government bond ratings to A2 from A3. The rating agency attributed the upgrade to Korea's track record of fiscal prudence, favorable macroeconomic performance, and the containment of geopolitical risks.
Moody's rating action raised the Republic of Korea's government long-term foreign-currency and local-currency ratings to A2 from A3, the country ceiling for foreign-currency bonds to Aa3 from A1, the country ceiling for foreign-currency bank deposits to A2 from A3, and the short-term ceiling for foreign currency bank deposits to P-1 from P-2. The local-currency bond and bank deposit ceilings remain Aaa and Aa1, respectively. The outlook on the ratings is stable.
"Korea's favorable macroeconomic performance will likely continue over the near term," said Moody's Senior Vice President Thomas Byrne. "Over the longer term, Korea's credit fundamentals should be strengthened by a renewed commitment to trade and financial sector and capital market liberalization, which should help enhance the country's competitiveness, improve consumer welfare and boost potential economic growth."
Byrne said the rise in government debt in recent years was mainly caused by the government intervention in the foreign exchange market and by fiscalization of contingent financial-sector liabilities from the regional financial crisis of 1997.
"Current policies, including minimal intervention in the foreign exchange market, will allow a gradual decline in government debt," said Byrne. "The government has so far managed to accommodate rising costs from social welfare demands and engagement with North Korea without exerting much pressure on the budget, as is reflected in consistent budget surpluses since 2000."
On the external front, he said, a substantial buildup in official foreign exchange reserves provides a fair amount of insulation from external shocks, which is of renewed importance in light of the rise in Korea's short-term external debt. The growth in short-term liabilities of the banking sector has led to some slippage in Korea's external liquidity indicators, although Korea's overall external payments position remains in a sound position. Such strength is also reflected in the emergence of several globally competitive industries which have contributed to robust export performance and are likely to help support Korea's external as well as domestic economic performance.
"Unfolding developments involving the implementation of February's six-party agreement should allay some concerns over geopolitical risks associated with North Korea, which are incorporated in South Korea's ratings," said Byrne. "Foremost has been the threat posed by North Korea's nuclear weapons program to regional security and to risks of proliferation of nuclear materials, which could lead to a re-escalation of military tensions on the Korean peninsula."
As long as there is a viable framework for containing such geopolitical risks, he said, Moody's considers the future fiscal cost of engagement with North Korea to be manageable at this stage of developments and consistent with South Korea's ratings.
"However, there could possibly be much larger costs to South Korea under a 'Marshall Plan' for the North should there be a collapse or a radical change in policy of the Pyongyang government," said Byrne. "But that burden could be shared to some extent among the regional powers if the North were to engage the international community constructively and reform its economic, political, and foreign policies."
Whatever scenario unfolds, he said, "a cohesive approach by the five governments negotiating with North Korea seems essential for optimal political and economic outcomes."
Byrne said that for Korea's rating to move up further, Moody's would look for the government to reduce its debt ratios. Other factors that will influence the future rating trajectory are the maintenance of a strong external payments position, including a containment of short-term external liabilities, and the sustainability of Korea's favorable macroeconomic performance.
Press releases of other ratings affected by this action will follow separately.
