There is no time for complacency

Moody’s Investors Service raised South Korea’s sovereign debt rating up a notch to Aa2, the third-highest rating on the agency’s scale. It is the best credit score Korea has ever earned from the three major international rating houses.

The upgrade places Korea’s credit a level above China’s and two above Japan’s. Aa2 is the third-highest rating among 21 total, and only seven countries from the Group of 20 enjoy a higher score.

This is great news for Korea, particularly with exports and domestic demand sluggish and the global economic outlook so dreary following the U.S. interest-rate hike and a faster-than-expected slowdown in the Chinese economy.

Moody’s upgrade is a vote of confidence for the Korean economy at a time when most other emerging economies are doing so badly due to plunging oil prices.

The boost in the credit rating could help domestic companies raise funds more easily at favorable borrowing rates and attract more investment into the Korean stock and currency markets. It could also raise morale and confidence as corporate investment and private consumption lag.

However, this does not mean we can afford to be complacent.

An international rating is an evaluation of past and current data. It is not a future indicator. Just before the Asian financial crisis in 1997, Koreans enjoyed a series of upgrades. Rating agencies bestowed the highest ratings on investment banks even as they headed toward a collective meltdown in 2008.

So we need not depend too much on international ratings. They are just measurements for debt repayment based on macroeconomic figures like the government fiscal state, the trade balance and foreign currency reserves. Japan even remained in the top-tier during its “lost decades.”

Economists have repeatedly warned that Korea could head toward long-term stagnation like Japan. The country’s growth potential is fast losing steam due to a shrinking work population. Much-needed structural reforms in labor and education and industrial realignment have been slow. We must not be deluded by the ratings. Instead, we must use this opportunity to accelerate structural reforms.

JoongAng Ilbo, Dec. 21, Page 34