Fitch may cut Korea's growth outlook to below 2%

Jeremy Zook, Fitch Ratings' associate director of Asia sovereign ratings

Agency warns Japan could risk suffering bigger losses

By Park Jae-hyuk

Fitch Ratings has hinted it may lower its 2019 economic growth outlook for Korea to below 2 percent, citing the potential effects of Japan's export restriction measures against Korea. The global ratings agency cut its 2019 forecast to 2 percent in its June report. Two other global ratings agencies ― Moody's Investors Service and Standard & Poor's Global Ratings ― already hinted they may downgrade their forecasts after Japan's export restrictions went into effect July 4.

With an expectation of critical damage to Korean chipmakers, the agency said Japan could risk suffering larger losses if the ongoing trade confrontation escalates further.

“Japan's imposition of restrictions on certain exports to Korea adds yet another headwind to Korea's growth outlook,” Jeremy Zook, Fitch Ratings' associate director of Asia sovereign ratings, told The Korea Times via email, Monday.

“We are still assessing the potential impact of Japan's measures on the Korean economy, particularly through the effect on the semiconductor sector.”

Although he did not come up with specific numbers, his remarks implied Fitch may cut its growth outlook for Korea to below 2 percent after reflecting on the possible outcome of the ongoing dispute with Japan.

“The sector is already in the midst of a cyclical downturn,” the analyst said. “As Korean semiconductor producers are highly integrated into supply chains with Japan, any significant disruptions could put downward pressure on our growth forecast.”

Fitch's press release issued late Monday also showed its concerns over the Korean economy.

It said Japan's decision to impose tighter restrictions on exports to Korea of key raw materials for the semiconductor and display industries is likely to hurt memory chip and display manufacturers, such as Samsung Electronics, LG Electronics and SK hynix.

“Short-term disruptions remain unlikely due to the companies' stockpiles, but if the restrictions remain in place, South Korean chipmakers' and display manufacturers' production lines are likely to be disrupted,” the agency said in its press release.

“This will drive up memory chip and display prices significantly, which in turn will increase end-product prices as Korean companies have leading positions in their respective markets.”

The agency added it believes downside risks have increased for these businesses, although it has not taken any rating action on Korean tech companies.

Impact on Japanese companies

Korean companies will not be the only victims of the trade war, however, according to Fitch.

“Japanese exporters have much to lose should this dispute escalate, while Korean companies will try to switch to other sources should the dispute prove to be long-running,” the agency said.

“Prolonged trade conflict between the two countries could backfire and hurt Japanese companies over the long term. For example, Japanese makers of manufacturing equipment would also be negatively affected by these measures due to lower demand from Korean customers.”