Fear factors weigh down on Korea

Which of 3 global rating agencies will first give sovereign debt upgrade?

By Kang Seung-woo

Korea remains one of the few shining spots in the bleak economic landscape of the world ― a slumping U.S. economy and a smoldering eurozone debt crisis.

On the plus side are strong external liquidity, improved fiscal health and rapid economic recovery.

But weighing down on it are political fear factors.

Among them is an unstable political situation in North Korea that is still undergoing a power transition to the 29-year-old grandson of its founder Kim Il-sung.

Kim Jong-un, the Swiss-educated third son of Kim Jong-il, who died of heart failure last month, has yet to consolidate his power and any disruption can entail a significant risk to South Korea.

The second is Korea’s export-oriented economy that is subject to ups and downs from in global conditions.

Domestic election-year politics ― National Assembly elections in April and presidential poll in December ― is another fear factor. Ideological divide is deepening with the establishment politics ― opposition as well as the ruling camps ― being under siege. Ahn Cheol-soo, a doctor-turned-software entrepreneur, is emerging as a power to be reckoned with. Already Ahn has demonstrated his influence with Park Won-soon, a civic leader, who was elected as Seoul mayor thanks to Ahn’s endorsement.

Still, the overall picture is not all that discouraging.

According to the Korea Center for International Finance (KCIF), the Paris-based ratings agency has recently scaled down Asia’s growth outlook for 2012 to 6.8 percent from 7.4 percent, citing the struggling global economy, but the region’s countries including Korea are expected to enjoy a strong momentum with positive ratings action behind firm policy initiatives during the global financial crisis, improved public and external finances and relatively positive med-term growth prospects.

Fitch also upgraded the outlook for Korea’s long-term foreign currency rating to “positive” from “stable,” confirming its credit rating at “A plus,” its fifth-highest level. A positive outlook means that the rating can be lifted within 12 to 24 months.

Along with Fitch, Moody’s Investors Service and Standard & Poor’s (S&P) have also placed the nation’s credit rating in stable territory.

According to New York-based Moody’s, it retained the country’s A1 status, or the fifth-highest out of its 21 rating scale on Dec. 23 after April 2010 despite the recent death of North Korean dictator Kim Jong-il, continuing to rate Korea on economic and financial fundamentals.

S&P, another New York-based credit appraiser, early last month decided to maintain the credit rating on the east Asian country at “A,” the sixth-highest level and kept its credit outlook at “stable,” saying, “Korea’s favorable policy environment, sound fiscal position, and a net external creditor position lend support to the government’s creditworthiness.”

Market watchers, however, say that there are some uncertainties that can derail the nation’s upward trend in credit rating.

“Above all, geopolitical risk could lead to ratings adjustments,” said Lee Chang-seon, a senior economist of LG Economic Research Institute.

“The nation’s stable outlook on the ratings will depend on the situation with the North.”

The three global credit rating agencies also expressed concerns that the aftershock of the long-time ruler’s death could be a potential source of downside risk.

According to them, whether the transfer of power to the young and inexperienced leader, Kim Jong-un, will occur without a power struggle, which would increase the likelihood of unpredictable military actions, or provocation against the South, has been considered to be a crucial issue in regional stability.

Thus, the bleak economic outlook for 2012 can be a challenge.

Foreign investment banks (IBs) have cut the nation’s growth outlook to 3.4 percent from 4.5 percent for this year, citing growing market jitters over the European debt crisis, and the sluggish economic growth can affect its credit appraisal.

“The global economy is expected to face a downturn this year and it could result in Korea expanding fiscal spending,” Lee said.

Fitch also noted in November that the country will have to successfully deal with a large-scale foreign bond maturity payment of $66 billion in 2012 without putting pressure on external finances or foreign reserves and staying on track to achieve a credit upgrade.

Lim Hee-jung, a research fellow of Hyundai Economic Research Institute, said that the fluctuation in the foreign exchange can be a factor, as well.

“The strong won will have a negative impact on exports, as the country loses price competitiveness amid the faltering global economic recovery,” he said.

In- and outside of Korea, the nation’s snowballing household debt has been seen as a huge challenge to its economy, but analysts say that its impact will be limited in credit evaluation.

“The credit rating agencies have warned against the ballooning household debt and it can pose a worse threat to the nation’s economy in times of a downturn, but given that Fitch hinted a credit upgrade for Korea, it appears to be taking the debt issue into consideration,” Lee said.

“Although household debt is not a positive factor for the national economy, it will be not an immediate threat,” Lim said.

“(I think that) the Korean economy’s fundamentals are solid, so Fitch may be suggesting that it would consider upgrading Korea’s credit rating.”