Moody’s Investors Service on Friday forecast the Korean economy to grow 3.0 percent this year and 2.8 percent the next in line with the Korean central bank expectations.

Moody’s earlier this month reaffirmed Korea’s sovereign debt rating at Aa2 with a stable outlook and stayed pat on its rating at the third highest on its scale since its last upgrade in December 2015.

“Korea`s (Aa2 stable) credit profile is supported by very high economic strength given a diversified and competitive economy, with robust growth potential (around 3% over the next five years), and high income levels (around $37,730 per capita in purchasing power parity terms in 2016),” and the government has strong “fiscal fundamentals” with moderate debt levels, said the credit rating agency.

The Bank of Korea last week revised up its outlook for this year’s annualized growth to 3.0 percent and forecast 2.9 percent for next year.

Prospects of the gross domestic product expanding beyond its growth potential of around 3.0 percent increased after the GDP gained a surprising 1.4 percent against the previous three-month period, its biggest pace in seven years, in the third quarter.

The agency nevertheless cited geopolitical risks related to North Korea as the major credit constraint. “Any military conflict would damage the economy, the functioning of the government and its finances, and potentially the country’s payment system. The severity of the credit impact would depend on the duration and intensity of any conflict,” it said.

It added the possible collapse of North Korean regime is another factor that could heighten the geopolitical risks on the Korean peninsula. “Depending on how (collapse of North Korean regime) would unfold, such an event could lead to acute financial strains for Korea`s government for an extended period, while potential economic benefits would likely take time to materialize.”

Apart from the geopolitical risks, it warned the country’s snowballing household debt could restrain the country’s economic growth in the long term. “The Korean government has taken and continues to introduce measures to counter potential financial stability risks…this mitigates but does not eliminate the risks to growth posed by high household debt,” it said.

By Kim Se-woong and Cho Jeehyun

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