Moody’s cuts Korea’s growth estimate to 0.1%, mulls downgrade in bank rating

2020.03.26 13:56:37 | 2020.03.26 15:13:33

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Moody’s Investor Services on Thursday has slashed this year’s growth estimate for South Korea to 0.1 percent from 1.4 percent last revised earlier in March and warned of downgrades for four regional banks due to COVID-19 economic fallouts.

Moody’s warned of “unprecedented shock” and projected a contraction of 0.5 percent in global economic growth in 2020 due to rising costs of the coronavirus outbreak and policy responses. Moody’s estimated baseline for gross domestic product growth for Korea this year at 0.1 percent after a downgrade to 1.4 percent from 1.9 percent on March 9. For next year, the estimate for growth was mostly unchanged at 2.5 percent from previous 2.6 percent.

Earlier on Tuesday, Moody’s placed all ratings and assessment of four Korean regional banks – Busan Bank, Daegu Bank, Jeju Bank, and Kyongnam Bank- on review for downgrade, based on their concentrated exposure to the highly affected regions and industries.

“The review for downgrade reflects Moody`s expectation that Korea`s economic growth will slow as well as the risk of a deterioration in the banks` credit quality due to the breadth and severity of the shock from the coronavirus outbreak, said Moody’s in a press release.

While economic activities slowed down significantly amid the virus outbreak, the impacts have been bigger in the regions where the four banks’ operations are concentrated.

Daegu Bank mainly operates in Daegu and North Gyeongsang Province, two southeastern regions that account for more than 80 percent of the confirmed COVID-19 cases in Korea. Busan Bank’s operation concentrates in Busan, Korea’s second largest city on southeast coast, serving as the country’s major transportation hub. Kyongnam Bank functions as a major lender in Ulsan and South Gyeongsang Province, where production bases of the country’s big manufacturers encompassing automobile, shipbuilding and petrochemicals, are located. Jeju Bank’s operation is based in Jeju Island whose economy depends heavily on tourism.

Given the four banks’ high exposure to distressed businesses in the regions and industries significantly hit by the virus outbreak, Moody’s has placed all ratings and assessments under review for downgrade, including short- and long-term rating for debt and deposit, it said.

Separately on the same day, Moody’s placed the baa2 baseline credit assessment of state-invested Industrial Bank of Korea (IBK) under review for downgrade. The baseline credit assessment represents the agency’s opinion on the bank’s probability of standalone failure without external supports, like from the government. The agency, however, affirmed IBK’s Aa2 long-term deposit rating with a stable outlook.

In addition, Moody’s placed the A1 foreign currency long-term issuer rating and P-1 short-term issuer rating of IBK Securities Co., a subsidiary of IBK, under review for downgrade.

Market experts, however, do not expect that the local banks would immediately face liquidity crisis due to the latest Moody’s move as the international rating is mostly needed is issuance of new debt in foreign currency. Korean regional banks rarely seek funding from overseas. “Deposits account for 70 to 80 percent of funds at regional banks so that the impact from the credit rating change would be limited,” said an industry official.

But more companies could face credit downgrades if the global pandemic lasts longer than expected, warned the experts. Moreover, the recent global oil price war is adding stress to the global economy already crippled from the pandemic.

Last month, Moody’s slashed credit ratings for Korea’s petrochemical majors SK Innovation, SK Global Chemical, and LG Chem. Standard & Poor’s (S&P) also warned of downgrade for SK Innovation and SK Global Chemical by lowering outlook. Previously on March 19, S&P lowered refiner GS Caltex’s rating to BBB from BBB+.

As for retailers, they are already moved to the junk bond level.

Separately, S&P withdrew its short-term rating of A-1 on $2 billion European commercial papers managed by Woori Bank upon the request of the commercial lender. “The withdrawal request to S&P was to save costs as the bank already has ratings by Moody’s,” said a Woori Bank official, adding that it is not due to the risk of credit downgrade.

By Choi Seung-jin, Kim Gyu-sik, Lee Sae-ha, and Cho Jeehyun

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