Nuke tests won't affect credit ratings: Moody's
By Kim Jae-kyoung
Steffen Dyck
SINGAPORE ― Moody’s Investors Service says North Korea’s nuclear and missile tests will not affect Korea’s credit rating unless they develop into a military confrontation or regime collapse.
“(Even after the fifth nuclear test,) we assess the sovereign’s susceptibility to geopolitical event risk as ‘moderate,’” Steffen Dyck, a senior analyst of the global credit ratings agency, told The Korea Times.
He is vice president of the agency's sovereign risk group that evaluates Korea's rating.
“This moderate susceptibility to geopolitical event risks includes both risks stemming from North Korean military provocations and regime instability,” he said. “As such, the most recent event is captured in our rating assessment.”
Dyck said South Korea's robust alliance with the U.S. will continue to contain the risk of renewed military conflict on the Korean Peninsula.
“War risks would have short-term disruptive effects on the functioning of the government in Seoul and the country's payments system,” he said.
“From a sovereign credit perspective, a geopolitical event risk lies more in the potential for an internal regime collapse in North Korea, leading to acute financial strains for South Korea's government for an extended period.”
In December 2015, Moody's upgraded South Korea's sovereign credit rating to a record high Aa2 from Aa3. Moody's then changed the outlook to stable from positive.
Dyck cited four factors as the credit strengths underpinning Korea’s Aa2 rating: a high degree of economic resiliency; fiscal discipline and moderate government debt; ongoing restructuring and institutional reforms, and reduced external vulnerabilities.
On the other hand, he picked four elements as credit challenges: maintaining competitiveness; high non-financial public corporation debt; high and rising household debt, and elevated geopolitical risks with relation to the North.
“Retaining economic competitiveness in the current more challenging global growth and trade environment will be key to future growth prospects,” he said.
According to the World Economic Forum (WEF), Wednesday, Korea has ranked 26th in overall competitiveness for three straight years due to its rigid labor market and lack of innovation drive.
“While elevated levels of household debt do not pose an imminent threat to financial stability, we see them as a potential drag on consumption and overall GDP growth if and when households are forced to consolidate,” Dyck said.
In its latest report, Moody’s said that while Korea's credit fundamentals will remain strong and resilient to adverse shocks, challenges exist and predominantly center on a rapidly aging society and relatively high exposure to China's economic slowdown.
“We expect that ongoing corporate restructuring and elevated levels of household debt will weigh on domestic demand,” it said.
“In addition, potential uplift from external demand will remain limited given our expectation of stable but low growth in advanced economies and only moderate growth pick-up in emerging markets.”
According to the U.S.-headquartered ratings agency, there are a couple of down factors that could lead to a negative rating.
They include a backtracking in ongoing structural reforms and deterioration of Korea's long-term growth prospects, and a material heightening of geopolitical risks associated with North Korea, such as from regime collapse, or an outbreak of military conflict.
Regarding Hanjin Shipping that recently went under court receivership, the agency said the decision was a step in the right direction.
“Although some short-term disruptions may occur, in the long run this should boost efficiency in the sector,” it said.