Fitch reaffirms S. Korea's rating at 'AA-', growth outlook at 3% this year

Fitch Ratings Inc. has reaffirmed South Korea’s sovereign credit rating at AA- with a “stable” outlook, citing robust external finances and resilient macroeconomic performance, while agreeing with Korean authorities in forecast of the economy expanding 3.0 percent this year.

On Thursday, Fitch Ratings kept Korea’s long-term foreign-currency debt unchanged at AA-, crediting the country as having “robust external finances, resilient macroeconomic performance, a dynamic export sector against geopolitical risks related to North Korea, and structural challenges from an ageing population.”

Fitch has kept Korea’s rating at AA-, the fourth highest level on its credit scale, since September 2012. Other countries with an AA- rating are Britain, Belgium, the Czech Republic, Hong Kong, and the United Arab Emirates.

Fitch Ratings forecast Korea’s real gross domestic product to remain above trend at 3 percent, in line with the Ministry of Economy and Finance estimate of 3.1 percent, on the back of consumption recovery and exports boosted by Korea’s semiconductor sector. The re-tightening of social distancing restrictions in December amid the recent surge of Omicron infections across the nation remain as a potential risk to the economy but “ongoing fiscal support should mitigate these risks,” according to Fitch’s rating commentary.

It also projects that the Bank of Korea (BOK) to raise base rates by 0.25 percentage points twice this year to manage financial risks, strong economic growth, and rising inflation but none in 2023.

Fitch expects fiscal deficit to narrow to 3.1 percent despite the proposed supplementary budget of 14 trillion won ($11.6 billion), and government debt ratio to reach 49.9 percent by the end of the year, much like other countries with this rating.

The agency noted that “fiscal space from a ratings perspective appears sufficient to accommodate Korea's rising gross government debt/GDP in the near term.”

However, Korea’s continued tolerance of active fiscal spending and fiscal deficits could potentially “add pressure to the rating over the medium term,” it added.

There is also further uncertainty to the medium-term fiscal outlook because of the upcoming presidential election in early March. The two leading candidates are both advocates of sustained fiscal support, suggesting that the country’s deficit would stay near the current level after the election.

Korea’s benchmark Kospi index closed at 2,663.34 won on Friday, trading 1.87 percent higher after choppy trading earlier on the same day. The Korean won stayed weaker against the U.S. dollar after opening at 1,202.8 won, which was up 2.2 from the previous day.

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