Fitch affirms rating, but growth seen lower in 2020

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Fitch affirms rating, but growth seen lower in 2020

Fitch Ratings maintained Korea’s credit rating and a stable outlook on that rating, but it did acknowledge growing trade risks and reduced the 2020 GDP growth forecast by 0.3 percentage points to 2.3 percent.

The New York-based agency said Friday that Korea’s long-term foreign-currency issuer default rating remains AA- and that the outlook is stable. Korea has held that rating and outlook since September 2012. AA indicates very low default risk.

Citing “robust external finances, steady macroeconomic performance and sound fiscal management against evolving geopolitical risks,” Fitch explained in a press release that Korea’s “underlying growth performance remains sound.”

The agency, however, said that it expects economic growth this year to be at 2.0 percent, compared to last year’s growth of 2.7 percent. This is lower than the Bank of Korea’s projection of 2.2 percent.

“Slowing global growth has intensified the downturn in the semiconductor sector, which has become a particularly critical part of Korea’s economy, driving a contraction in exports and weighing on facilities investment,” Fitch wrote.

Exports from Korea in July dropped 11 percent from the previous year, marking the eighth consecutive month of on year declines.

The agency said it expects another cut to the benchmark interest rate by 25 basis points by the end of the year to help the slowing economy. The central bank cut the key interest rate by 25 basis points to 1.5 percent last month, citing headwinds, such as the ongoing trade conflict with Japan.

Fitch voiced worries over the escalating U.S.-China trade row and export restrictions by Japan

“Japan’s recent removal of Korea from its ‘white list’ of trusted export partners is yet another hurdle for Korea’s economic outlook,” said Fitch. “This action could weigh on business confidence and investment.”

The government dispatched officials last month to global credit ratings agencies to address worries about the trade dispute.

Fitch expects conditions to generally improve in the following year, although it did downgrade the growth forecast.

It explained that a recovery in the semiconductor industry and a slower rise in the minimum wage could help the economy next year. Korea will raise the minimum wage by 2.9 percent next year compared to the 16.4 percent last year and 10.9 percent this year.

The agency added that it expects fiscal policy to become more expansionary. It projects Korea’s debt-to-GDP ratio to be at 37.1 percent this year and to rise to 40 percent by 2023 under the current administration’s signature income-led growth policy.

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