Strong economy warrants high rating: Moody’s

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Strong economy warrants high rating: Moody’s

Korea’s economy next year will stay stronger than many advanced economies although its growth rate will be slow, international ratings firm Moody’s said on Wednesday.

The firm announced it will maintain its rating for Korea next year at Aa3, the fourth-highest category, and also forecast the country’s gross domestic product will grow by 2.5 percent over the same period. The firm predicted a GDP growth rate of 2.8 percent for 2017.

“Relatively speaking, Korea will still grow stronger than many other advanced economies like Europe,” said Steffen Dyck, senior analyst and vice president of sovereign risk group at Moody’s. “The positive outlook on Korea’s rating is supported by ongoing regulatory and market reforms aimed at ensuring financial stability, strengthening competitiveness, and addressing external vulnerabilities.”

Speaking at a press conference, Dyck said slowing Chinese growth could have the most unfavorable impact on Korea’s growth, adding to worrisome domestic issues such as plunging exports, a high volume of inventories, skyrocketing household debt and demographic changes.

He said corporate and household debt levels and a U.S. interest rate hike will drag down growth for the next two and a half years, but will not likely have a serious impact on overall financial stability.

Moody’s identified fast-growing household debt as a threat, but said the Korean banking industry can deal with its credit. He said Korea enjoys healthy capitalization that allows active cross financing where the government plays a significant role.

Dyck said Moody’s had a positive outlook on the country’s economy as the public and private sectors are working on restructuring key industrial sectors and debt, while the government pushes restructuring processes and has kept the benchmark interest rate at a low level. The private sector has also adjusted management strategies to economize.

He acknowledged restructurings may hurt the local economy in the short term, but said they must be followed through to eventually benefit companies and the Korean economy.

“The Korean economy is at a point where corporate restructurings are necessary, as the Chinese economy slows down and its government has been pushing to rebalance its economic structure to put more focus on developing domestic economy. Korea should grab the opportunity.” said Dyck. “Restructurings may now have some negative impacts on Korean economy down the road, while tackling household debt issues, but will strengthen the corporate competitiveness.”

Chris Park, associate managing director of the corporate finance group at Moody’s Investors Service Hong Kong, said, “Considering the size of the Korean economy, some industries like construction and chemical were overcrowded with too many players, needing to be downsized. Not just the industry itself, but each company’s competitiveness will be enhanced if the restructuring processes continue on the voluntary level.”

However, Park added that as the government is a central player in the initiative there may be side effects on the private sector. Acquiring companies may struggle to find acquisition funds and deal with remaining debt.

Moody’s said the government’s initiatives like the industry restructurings may have an unintended negative impact on local commercial and policy banks, which have one of the lowest profitability levels globally.

Korea’s insolvent loans have not expanded significantly recently compared to other countries, but the portion of unpaid debt is high, resulting in low profitability of the lenders, said Graeme Knowd, managing director of financial institutions group at Moody’s Asia-Pacific in Japan.

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