Fitch says Korea's credit rating is 'resilient'

Finance

Published: 11 Nov. 2022, 17:27

Fitch says Korea's credit rating is 'resilient'

Speakers from Fitch Ratings at a press conference in Yeouido, western Seoul, Friday. From left to right are Jeremy Zook, Director, Sovereigns; Chang Hea-kyu, Senior Director, Financial Institutions; Matt Choi, Director, Financial Institutions. [JIN MIN-JI]

Korea's economy faces challenges, but its credit rating isn't in trouble, said Fitch Ratings Friday.

"Challenges to Korea's economic outlook are mounting as a result of slowing global demand, high inflation and rising interest rates," Jeremy Zook, Director, Sovereigns of Fitch Ratings, said at a press conference in Yeouido, western Seoul, Friday.

But Fitch expects its "rating to remain resilient to near-term economic headwinds, reflected by our recent affirmation of Korea's AA- rating with a stable outlook in September."

Korea has the external and fiscal buffers to navigate near-term challenges, he said, despite a number of risks related to market volatility, high household debt and geopolitical risks.

Fitch said Korean banking system’s operating environment was at A+, the third highest level among Asia-Pacific countries after Singapore and Australia.

That is despite falling household loans due to rapid interest rate increases and the chance of more non-performing loans.

“Higher leverage has exacerbated the vulnerabilities of the banking system, which accounts for about 60 percent of total household credit,” said Chang Hea-kyu, Senior Director, Financial Institutions for Fitch.

“Highly leveraged households are susceptible to abrupt and adverse changes in market conditions, such as a surge in interest rates without commensurate income growth or soaring unemployment.”

Korean households’ asset composition is highly skewed to property, accounting for around 60 percent of assets.

Chang also cited high indebtedness, a rapidly aging population and constraints to domestic consumption over the long term as some factors that may hinder economic growth.

The downturn in the property market could persist over the next few years, especially as prices became less affordable in recent years. But Fitch expects the overall degree of a property price decline to be moderate in the absence of a severe economic shock.

On the same day, Fitch forecast the Bank of Korea will raise the base interest rate by 50 basis points in an upcoming Nov. 24rd Monetary Policy Board meeting.

Fitch projects the central bank to “remain on hold at a terminal rate of 3.5 percent through 2023,” said Zook. “Inflation appears to have peaked, despite the recent uptick in October, and we forecast it to decline to 5 percent by the end of the year.”

Fitch’s GDP growth forecast for Korea is 2.6 percent for 2022 and 1.9 percent in the following year, a big drop from 4.1 percent in 2021.

“Geopolitical tensions with North Korea continue to escalate following the slew of recent missile tests by the North. We already incorporate a wide range of tensions in our current rating of Korea, including and beyond the recent escalation,” Zook added.

BY JIN MIN-JI [jin.minji@joongang.co.kr]