Fitch reaffirms Seoul’s AA- rating

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Fitch reaffirms Seoul’s AA- rating

Global rating agency Fitch Ratings on Friday reaffirmed its AA- rating for Korea, though it also highlighted lingering geopolitical risks and concerns of a trade war between the United States and China.

“Korea’s sovereign ratings balance robust external finances and a strong macroeconomic performance with ongoing geopolitical risk from the relationship with North Korea, and longer-run challenges of rapid population aging and low productivity,” Fitch said in its latest report.

Pyongyang’s commitment to denuclearization may ease tension on the Korean Peninsula, but the ratings agency said the process is likely to be “lengthy and prone to breakdown,” as negotiations are just starting and details still need to be worked out.

“Reunification does not appear to be on the cards for the foreseeable future, but it is a long-term possibility and could have large implications for the sovereign’s balance sheet,” it said.

The ratings agency said an escalating trade dispute between the United States and China, Korea’s two biggest trading partners, could weigh on the nation’s growth.

“The threat of a trade war between the United States and China represents a downside risk to Korea’s growth outlook, as 28 percent of its exports that are destined for China are partly intermediate goods that are subsequently re-exported,” it noted.

The Moon Jae-in administration’s economic policy focus on job creation and income-led growth is likely to strengthen domestic demand, but external demand from Korea’s largest trading partner China will cool, Fitch predicted. Higher oil prices will weigh on household real income and corporate profit margins, it added.

The country’s average gross domestic product growth of 3.0 percent in the first five months of this year is in line with the AA category median, but Fitch thinks the numbers could fall over the medium term to around 2.5 percent given the challenges to potential growth from low productivity and a rapidly aging population.

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