Fitch Ratings Inc. on Wednesday reaffirmed South Korea’s sovereign credit rating at AA- with a stable outlook, citing robust external finances and steady macroeconomic performance but also warned of lingering debt and geopolitical risks that could lead it revise its view and rating on Korea.
While keeping Korea’s long-term foreign-currency debt at the fourth highest in its rating scale at unchanged since 2012, Fitch Ratings credited South Korea has balanced “robust external finances, steady macroeconomic performance and sufficient fiscal headroom going into the coronavirus pandemic against geopolitical risks related to North Korea and medium-term structural challenges from aging demographics and moderate productivity growth.”
The agency noted that the pandemic “has weighed on economic growth and public finances, but domestic control of the virus accompanied by a robust policy response have limited the severity of the deterioration in these metrics relative to other advanced economies and AA peers.”
AA- is the fourth-highest rating in Fitch’s credit scale that is held by countries such as the United Kingdom, Hong Kong, Belgium, and Taiwan. Ten countries are given the highest AAA rating, including Germany, Singapore, and the United States, while three countries under the second-highest AA+ including Finland, and five countries under the third-highest AA including France.
Fitch’s decision to maintain AA- rating for Korea is contrary to a flurry of actions by major international credit agencies that have downgraded ratings of many major economies due to the virus-driven global economic downturn.
Moody’s Investors Service, Standard & Poor’s (S&P), and Fitch Ratings have downgraded 211 credit ratings or outlook of 107 countries. The U.K. and Canada have faced a downgrade in its rating and the U.S. and Japan in its outlook.
Fitch Ratings forecast the Korean economy to shrink by a modest 1.1 percent this year – better off than the median 7.1 percent contraction for AA economies – after reflecting the country’s “effective coronavirus containment strategy without the need to resort to strict lockdown measures.”
It, however, forecast Korea’s fiscal deficit to widen to 4.4 percent of gross domestic product this year, from a 0.6 percent deficit in 2019 due to the government’s aggressive fiscal response measures to counter the pandemic, as well as growing spending pressures from an ageing population.
Fitch Ratings also noted the stalled diplomatic efforts in improving the inter-Korean relations in the past six months, expecting delay of denuclearization negotiations after the U.S. presidential election and lingering uncertainty in the geopolitical issues.
By Lee Eun-joo
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