Election may prompt rating change: Moody’s

Moody’s credit rating agency has raised concerns over Korea’s economic growth and the banking industry in the wake of the general elections that have weakened the power of the Park Geun-hye administration to spearhead structural reforms.

In a report released on Monday, Moody’s hinted at a possible adjustment on Korea’s economic growth outlook since the ruling party’s election defeat will likely make it difficult to bring about structural reforms including those in labor markets.

“This is credit negative because a lack of reforms threatens to weigh on Korea’s growth outlook,” Moody’s report by Steffen Dyck, Vice President and Shirin Mohammadi, Associate Analyst, said.

“The weakening prospects for structural reform implementation come at a time of persistent external headwinds in the form of slowing growth in China and weak domestic consumer confidence,” the report added. “Consumer confidence has been affected over the past two years by domestic events, including the Sewol ferry disaster and the outbreak of MERS. Both events have also cast doubts over the government’s ability to handle difficult situations.”

The Bank of Korea will be announcing its adjusted economic outlook for this year, which many are expecting to fall below the earlier 3 percent.

Korean central bank governor Lee Ju-yeol has hinted that there are positive signs including rising consumer confidence and growing spending. He said there’s a possibility that this year’s growth may not reach the 3-percent target due to various uncertainties, especially from the global market. Although China’s economy grew by 6.7 percent in the first quarter, which met economists’ projections and it is within the 6.5 percent and 7 percent goal of the Chinese government, it was still the slowest growth since 2009.

However, the Korean deputy prime minister on economics and finance minister Yoo Il-ho have repeatedly stressed that the Korean economy will likely land at the 3.1 percent target, although other think tanks, including the International Monetary Fund, have lowered their outlook to the mid 2-percent range.

In order to reach the target growth, Yoo on Monday stressed that the government will strongly drive structural reform and economic stimulus efforts.

Because of the dwindling economic growth Moody’s, in another report released on Monday, said it was lowering its outlook on the Korean banking system from stable to negative as it expects Korean banks’ creditworthiness to weaken in the next 12 to 18 months.

“While our previous stable outlook had anticipated some weakening of profitability and pressure on asset quality, the operating environment for banks is deteriorating amid Korea’s diminished growth outlook and ongoing corporate sector restructuring,” said Sophia Lee, Moody’s Vice President.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]