South Korea’s public finances are no longer a strength for its sovereign credit rating but are now a neutral factor requiring near-term efforts to contain the rise in debt, global ratings agency Fitch said.
“We’ve seen a bit of a deterioration in public finance metrics over the past five or six years,” Jeremy Zook, Asia-Pacific director of Fitch Ratings, said in an interview with Reuters on Thursday.
“And that’s more on a basis relative to peers. Before the pandemic, Korea’s debt ratio was much lower than the median of ‘AA’ rating countries, but now, it’s right in line with the ‘AA’ median.”
Last month, when Fitch affirmed South Korea’s credit rating at “AA-” with a stable outlook, it expected the country’s sovereign debt ratio to rise to 51.4% of gross domestic product (GDP) in 2024, higher than the median of 48.5% for “AA” rated countries, and to 53.6% by 2028, diverging from a downward trend forecast for the “AA” median.
“It’s not a weakness for Korea’s credit profile, but it’s no longer a rating strength for Korea. It’s more neutral,” Zook said, adding fiscal metrics have become more important in rating South Korea and are being watched closely by the credit ratings agency.
Prudent fiscal spending had been an area of credit profile strength for Asia’s fourth-largest economy and helped to raise its rating on par with Britain, France and Belgium, but the pandemic era of stimulus policies pushed up its debt ratio sharply to 50.4% by 2023 from 35.9% in 2018.
“Our view has been for quite some time that maintaining a lower debt ratio in the near term is important for Korea to manage some of longer-run risks,” Zook said, citing ageing demographics as the biggest structural challenge.
Since its inauguration in May 2022, South Korea’s conservative Yoon Suk Yeol administration has been prioritising fiscal sustainability.
But, fiscal consolidation may now be “a bit more gradual after the election”, Zook said, referring to this month’s parliamentary election in which the liberal opposition party won a landslide victory.
The opposition Democratic Party is urging the government to draft a supplementary budget for a universal cash handout scheme of distributing 250,000 won ($181.96) per person to boost domestic demand. The government opposes the move.
Zook said the cash handout proposal, if implemented, would risk keeping inflation more persistent and could have an impact on the Bank of Korea’s monetary policy.
South Korea’s economy grew in the first quarter at the fastest pace in more than two years, beating market expectations, on a pick-up in domestic consumption and robust exports.
The economy is expected to grow 2.1% in 2024, after expanding by a three-year low of 1.4% in 2023, but “there is some upside to that forecast after the GDP number,” Zook said.
On monetary policy, Zook said the strong GDP data could push back interest rate cuts “just slightly”, while retaining his projection of two 25-basis-point cuts in the latter half of the year from the current 3.50%, the highest since late 2008.
($1 = 1,373.9500 won)