Fitch Lowers Korea’s Rating Outlook to Negative
By Kim Jae-kyoung
Staff Reporter
Fitch Ratings, a global credit rating agency, downgraded its rating outlook on Korea to ``negative'' from ``stable'' Monday, citing weakness in the nation's debt-ridden banking system.
The rate reduction is likely to impose further constraints on the banking sector, which is already suffering from a liquidity shortage and weakening capital base in the wake of a deepening economic downturn.
``The revision reflects concerns that the de-leveraging of the banking system may contribute to an erosion of the sovereign's external credit strengths, especially if it were accompanied by central bank interventions in the currency market to support the exchange rate,'' said James McCormack, head of Asia sovereigns at Fitch.
Local lenders are facing twin problems of solvency and profitability as a result of snowballing debts. They are forced to seek de-leveraging and shore up their capital base as many of the debts are likely to go bad due to an economic downturn.
The agency said that Korea is facing growing pressure on the rating downgrade despite its large holdings of foreign exchange reserves and the government's swift action to avoid a liquidity crisis.
``The Bank of Korea (BOK) had $212 billion in reserves in October and has access to a $30 billion currency swap arrangement with the U.S. and other swap arrangements that are currently being discussed with China and Japan,'' it said.
``Even so, the fiscal and foreign exchange cost of funding the de-leveraging of the banking system against the backdrop of a sharp slowdown in the economy and deterioration in bank asset quality could erode Korea's external credit strengths, especially if the BOK engages in less targeted foreign exchange intervention,'' it added.
However, the agency has affirmed its sovereign rating for Korea at ``A plus,'' its fifth-highest grade. Fitch has retained the current grade for Korea since it upgraded the rating a notch from ``A'' in October 2005.
``Fitch's action highlights what we view as the worst-case scenario for the sovereign, a credit rating downgrade,'' ING Group Asia chief economist Tim Condon said.
``A rising won-dollar exchange rate, especially a disorderly rise, increases the de-leveraging pressure Fitch cites,'' he added. ``We believe the authorities are wise to intervene to smooth the rise in the won-dollar rate and, hopefully force the pair back below 1,200.''
The agency also lowered its rating outlook on Malaysia to ``stable'' from ``positive''.