Toward a stronger economyMoody’s Investors Service raised its sovereign debt rating of Korea to Aa3, the fourth-highest ranking on its rating scale and on par with Japan and China. Korea’s credit rating is just below traditional advanced economies like the United States, Germany and six others.
The news is a timely vote of confidence for a Korean economy that has been plagued by woes domestic and abroad. The economy is expected to underperform the central bank’s estimated 3 percent growth this year, and household debt figures are in the trillions of won. At the same time, exports are expected to fall sharply from last year, threatening our trade surplus. And domestic demand is sagging deeper as even well-off consumers refrain from spending.
The news from abroad is even more depressing. Instead of easing, the credit crisis in Europe appears to be worsening. The Chinese economy is struggling to avoid a hard landing. And the diplomatic spat between Korea and Japan over the Dokdo islets may lead to the cancellation of the currency swap arrangement with Japan. The country’s main exporter, Samsung Electronics, lost an expensive court battle with smartphone rival Apple, which could cost it significantly in terms of U.S. revenue.
So the rating upgrade is certainly a morale boost to the country and sends a message abroad about the strength of the Korean economy. Moody’s cited Korea’s “strong fiscal fundamentals” that would enable authorities to better cope with domestic and external risks. The agency also said the country’s strong export competitiveness means that the economy could rebound fast from a slowdown once the global economy picks up. The news bodes particularly well for the foreign exchange market, where investment sentiment soured amid concerns about record-high levels of foreign debt and increasing short-term borrowing.
Moody’s still warns that a surge in public and household debt could hurt fiscal integrity. Welfare and social infrastructure campaign promises during the presidential election could also be a problem. So, the government must somehow balance the needs of society with protecting the country’s finances. Authorities should also try to lessen volatility in the foreign exchange market.
If we focus on our strengths and tend to our weaknesses, the upgrade will be the opening page of a stronger economy.