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Head of Fitch Asia says deal good for economy

‘It’s good for growth and Korea’s rating, but I’m not sure if it will trigger a rating change.’

Apr 05,2007
Korea’s free trade agreement with the United States will stoke export growth, spurring economic expansion, and may help it attract investment, a Fitch Ratings analyst said.
The accord is “supportive” of Korea’s credit rating, though unlikely to prompt an immediate upgrade, James McCormack, head of Fitch’s Asian sovereign ratings, said in an interview in Seoul yesterday. Analysts from Fitch are in Korea this week for an annual review of the economy.
Korea’s won and shares rose after negotiators from the two nations reached an agreement this week on free trade, including the elimination of duties on Korean autos and apparel. America is Korea’s second-largest export market, and annual trade between the countries is worth $77 billion.
“It’s good for the medium term growth outlook, and it may help attract more foreign investment into Korea,” McCormack said. The deal “will help support the fundamental strength of the sovereign rating.”
In June 2006, Fitch affirmed the nation’s long-term foreign currency credit rating of A+, the fifth highest it awards, the same as Taiwan’s rating and one lower than Hong Kong’s.
“On the whole, it’s good for growth and the rating, but I’m not sure if it will trigger a rating change,” McCormack said.
A free trade deal may boost Korea’s exports to the world’s largest economy by as much as $10 billion annually, according to the U.S. International Trade Commission. The accord has to be ratified by U.S. Congress and Korea’s legislature.
Korea’s won rose to a six-week high this week after the trade accord was announced, and the Kospi stock index set a record yesterday.
Fitch last raised Korea’s rating in October 2005, citing reduced security risks following a declaration between South Korea, North Korea, the U.S., China, Japan and Russia on the removal of nuclear weapons from the Korean Peninsula.
North Korea subsequently abandoned the talks and detonated a nuclear device in October 2006. Fitch’s McCormack said the nuclear issue remains a constraint on the South’s rating.
“In order for us to move the rating, we’d have to be satisfied the North Korea issue would be more fully resolved,” he said.
On Feb. 13, North Korea pledged to end its pursuit of nuclear weapons in exchange for energy aid and promises from the United States and Japan for steps to normalize relations.
The risks for South Korea include the “security risk” and the “reunification cost,” McCormack said. “It’s difficult to move South Korea’s rating a lot higher because of the unknown.”



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