MARC has affirmed the Republic of Korea’s (South Korea) foreign currency sovereign rating of AAA with a stable outlook, based on its national rating scale. The AAA rating reflects several credit strengths, chief among which are economic resilience, prudent fiscal management and a strong external position. Thanks to fiscal discipline, the government has, for example, a net positive asset position. Meanwhile, the economy has continued to enjoy current account surpluses, even in 2019 despite a difficult trade environment. South Korea is, not surprisingly, a net international creditor with a net international investment position standing above 30% of gross domestic product.

A key immediate credit challenge is the disruptive COVID-19 pandemic, which has resulted in increased economic and financial risks. Aggressive fiscal spending has, however, helped significantly mitigate the impact of the pandemic. In 2020, gross domestic product is expected to contract, though by low single digits in percentage terms.

The stable outlook reflects our expectation that South Korea’s substantial fiscal and external buffers will remain intact and economic, monetary and fiscal management will continue to be prudent and pragmatic over the next 12 to 18 months. We are nevertheless cautious on the outlook given that there is still no effective vaccine for COVID-19. Additionally, geopolitical risk on the Korean Peninsula remains elevated amid signs that progress made in recent reconciliation efforts is crumbling.

Going forward, South Korea’s credit profile will improve if there is increasing evidence that the government’s fiscal and monetary policies to mitigate the impact of the COVID-19 pandemic continue to be effective. It will, on the other hand, be impaired if: a) easing fiscal and monetary policies prove ineffective in mitigating evolving economic and financial risks; b) there are serious resurgences of the viral pandemic; and c) geopolitical tensions on the Korean Peninsula further escalate.

Contacts:
Lee Si Xin, +603-2717 2942/ sixin@marc.com.my; 
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my.