Moody's Investors Service on Monday raised its sovereign rating on Korea by one notch to "Aa3," citing the country's strong fiscal fundamentals, higher economic resilience and competitiveness.
The global credit appraiser upgraded its credit rating of South Korea from "A1," also citing South Korea's reduced external shocks and continued status quo of geopolitical risks from North Korea. The upgraded level is the appraiser's fourth-highest investment grade and the highest one Moody's has ever granted to Korea.
"Korea's strong fiscal fundamentals enable a relatively large degree of policy space to cope with contingent domestic risks and external shocks. Its government finance metrics are very well placed among all Aa-rated peers," the credit ratings agency said in an emailed statement.
"Secondly, the Korean economy has demonstrated resilience to external shocks. It avoided a recession because of the global financial crisis in 2009 and rebounded strongly in 2010," it added.
The upgrade comes after Moody's raised its outlook for South Korea's debt to "positive" in April this year, signaling that it could revise up the A1 rating in the months to come. The agency had maintained the A1 sovereign rating for South Korea since 2010.
Moody's sent its delegation to Seoul in June for annual talks with policymakers here to gauge the latest economic and financial difficulties confronting Korea.
The move by one of the world's three major credit ratings agencies comes despite gloomy outlooks over Asia's fourth-largest economy facing shrinking demand and toughening market conditions caused by the eurozone crisis.
South Korea's gross domestic product grew 0.4 percent in the second quarter of this year, the slowest growth since a 0.3 percent expansion in the fourth quarter of last year. It also sharply decelerated from a 0.9 percent on-quarter expansion tallied in the first quarter.
Anemic exports expansion is one of the main reasons behind the latest growth figures. In July, exports fell 8.8 percent from a year earlier, the sharpest decline since September 2009, according to government data.
Moody's admitted that South Korea's economic growth is slowing in the face of the global downturn and noted that its competitiveness of its export sector will help lead a rebound as the global economy recovers.
Moody's also expected that the status quo of geopolitical risks surrounding the Korean Peninsula will not be "adversely disrupted by the ongoing leadership transition in Pyongyang.
A possible increase in cooperation between North Korea and China could decrease the risk of a sudden collapse of the regime in Pyongyang, while a long-standing deterrence provided by Washington will contain risks related to renewed military conflict between the two Koreas, it added.
The rating agency said that concerns over increased non-financial sector debt have been allayed by the government efforts to tackle the problem. Instead, it noted public corporation liabilities still remain as a concern, which it worried could affect the country's future rating trajectory.
With regard to rising household debt, it admitted that concerns remain evident but added, "We do not consider that such debt poses near-term risks to the banking sector, or to the government's balance sheet, if it is contained."
Eun Sung-soo, the head of the finance ministry's international financial bureau, told reporters that Moody's rating upgrade attested to the government's strong economic fundamentals and ability to tide over a global crisis.
"This is something that the country should feel proud of and happy about," he said.
He also expected that it will likely help ease borrowing costs for the government and the private sector, while having a positive impact on future decisions to be made by other ratings agencies on South Korea's sovereign debt ratings.
Currently, Fitch Ratings and Standard & Poors' maintain their sovereign debt ratings onKorea at A-plus and A, with the outlooks of "positive" and "stable" respectively. (Yonhap)