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| FitchRatings Director of Sovereign Ratings Jeremy Zook, far left, speaks during a press conference held at Conrad Seoul on Yeouido, Seoul, Friday. Korea Times photo by Anna J. Park |
FitchRatings assess Korean economy maintains solid fundamentals
By Anna J. Park
Despite increasing challenges to Korea's economic outlook, such as high inflation and weak external demand, a renowned global ratings agency views that the country's sovereign rating still remains at a resilient and solid level.
During a press conference held at Conrad Seoul on Yeouido, Seoul, Friday afternoon, Jeremy Zook, Director of Sovereign Ratings at FitchRatings, said that the ratings agency sees that Korea's external finance position provides a sufficient buffer to manage increased external volatility. The press conference was hosted on the sidelines of FitchRatings' seminar titled, "Fitch on Korea Conference," held earlier in the day at the same venue.
"At this point, we expect the rating to remain resilient to near-term economic headwinds, reflected by our recent affirmation of Korea's 'AA-' rating with a stable outlook in September," Zook said at the press conference. "Korea maintains sufficient external and fiscal buffers, in our view, to navigate the near-term challenges. That said, there are a number of risks that we are watching related to external and domestic market volatility, high household debt and geopolitical risks," he added.
Regarding the country's debt-to-GDP ratio, Zook said Korea's government debt is still at the 'AA' median, although it has risen considerably during the pandemic.
"Korea's debt-to-GDP ratio has risen considerably during the pandemic to our forecast of 49.5 percent. However, this is still right in line with the 'AA' median. The 2023 budget presented by the administration proposed a significantly narrower deficit in 2023 and beyond," he said.
The global ratings agency director also said that the country's rising household debt remains at a manageable level, despite its rapid increase during the past few years.
"We view household debt as a manageable vulnerability amid rising rates and slowing growth. Rising rates will push up household debt-service burdens, given that a very high share of almost 80 percent of outstanding loans are on variable rates. In the absence of a more severe economic shock, this is likely to result in weaker household consumption rather than financial stability risks," Zook said.
When it comes to the economy's growth forecast, he elaborated that Korea's GDP growth outlook is forecast for 2.6 percent in 2022. But the outlook is expected to be lowered to 1.9 percent during the next year due to growing downside risks, including tightened monetary policies and slightly decreased foreign exchange reserves.
In particular, he mentioned that Korea's inflation rate is currently somewhat higher than those of other developed countries. However, the ratings expert added that inflation would decline to five percent by the end of the year, as the Bank of Korea (BOK) will likely take an additional interest rate hike later this month.
"We forecast the BOK to hike its policy rate by an additional 50 basis points in the November meeting and remain on hold at a terminal rate of 3.5 percent through 2023. Inflation appears to have peaked, despite the recent uptick in October, and we forecast it to decline to 5 percent by the end of the year," Zook explained, adding that there exists a general expectation that the BOK is able to support sufficient liquidity.
Meanwhile, he said that Korea's deteriorated current account balance has more to do with short-term impacts, such as soaring global energy prices, the depreciation of the won and equity outflows. He emphasized that Korea is still a strong net external creditor with large foreign exchange reserve buffers.
FitchRatings reaffirmed Korea's sovereign ratings at AA- in late September, which is categorized as a stable rating and the fourth-highest rating of the agency, mainly thanks to the country's strong credit fundamentals and sound fiscal finances. As to geopolitical tensions with North Korea, Zook said Friday that such heightened risks have already factored in the agency's current rating of South Korea, "including and beyond the recent escalation."
Amid soaring global interest rates to fight against inflation, FitchRatings made changes in its sovereign ratings to 35 countries in total. 11 countries of them received upgrades, while 24 got their sovereign ratings lowered. In particular, 23 out of 24 countries that got downgrades are emerging markets (EM), showing that small EM countries stand most vulnerable to increased market anxieties, strengthened dollar values and geopolitical shocks.
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