Debts still need to be tackledBenefiting from a string of positive economic news, the South Korean stock market gained another boost with the sovereign credit rating upgrade by Moody’s Investors Service on Wednesday. Moody’s raised South Korea’s long-term foreign and local currency credit ratings to A1 from A2, citing the country’s “exceptional level of economic resilience to global crisis while containing the government’s budget deficit.” The one-notch investment rating upgrade, the fifth highest in the agency’s rating scale, pushes the country’s credit rating to the level before the 1997-1998 Asian financial crisis.
The rating upgrade serves as a performance review of the economy’s ability to ride the global financial crisis after Korea took swift and radical policy actions and increased foreign currency reserves without risking its fiscal and financial health.
The Korean economy’s resilience and risk response stood out, as suggested by the Moody’s upgrade, as other economies remain mired in debt and an economic slowdown. Moreover, the news comes amid escalated tensions on the peninsula amid speculation of North Korea’s involvement in the sinking of the Cheonan naval corvette and concerns about the global trade situation due to sovereign debt problems in southern Europe and the U.S.-China dispute over the value of the Chinese yuan.
The sovereign rating upgrade will reap benefits for Korea Inc. Korean companies can raise capital in overseas markets on more favorable terms and foreign companies will be encouraged to invest more in Korean assets. The composite Kospi index hit a 22-month high and the won rose to a 19-month high upon the news.
There is no need to be overexcited by a foreign agency’s rating reviews. The country’s investment grade A1 rating is on par with China, but still lags behind Asian countries like Japan, Singapore and Taiwan. Ratings for Korea by the other big credit agencies - Standard & Poor’s and Fitch - are still below the 1997 crisis level.
Now that the economy appears to be back on track, we have a lot of work to do and more ratings upgrades will follow naturally if we strengthen our economic fundamentals. We must address, most of all, the problem of excess debt. Authorities must monitor banks and companies so that they do not borrow recklessly. Banks must reduce their loan-deposit ratios.
The government must set up a long-term plan to address the rapid growth in fiscal debt and debt levels at state institutions. We need to pay special attention to household debt and asset prices before they cause problems.
Most of all, we need to continue efforts to rebalance the economy so that growth rests more on domestic investment.