Interest rates will not plunge rapidly next year, warns S&P Global

Finance

Published: 06 Dec. 2023, 16:45

Interest rates will not plunge rapidly next year, warns S&P Global

Directors and economists from S&P Global Ratings and Nice Investors Service attend a press conference held to discuss debt, wars and sovereign ratings at Fairmont Ambassador Seoul in Yeouido, western Seoul, on Wednesday. [NICE INVESTORS SERVICE]

It is unlikely that central banks will rapidly slash interest rates next year, extending risks associated with project finance loans in Korea, according to S&P Global Ratings.

The global ratings agency warned against the widespread expectation that the Federal Reserve will cut interest rates at a fast pace, said Louis Kuijs, chief economist, Asia-Pacific, S&P Global Ratings, at a press event jointly hosted by the Seoul-based Nice Investors Service in Yeouido, western Seoul, on Wednesday.

The Fed's rate cut will likely initiate from the second half of next year, he added, which could affect the rates decision by the Bank of Korea.

Extended periods of high interest rates will inevitably affect the property market, which is suffering largely due to the delinquency of project finance loans.

“Aggravation of [risks associated with] project financing loans will be inevitable considering low economic growth and high interest rates next year,” said Kim Dae-hyun, director, financial services ratings, Asia Pacific, S&P Global Ratings.

The impacts will be especially grand on savings banks and small- and medium-sized brokerage firms that are not able to recover without external help unlike those under major banking groups that have an “adequate capital buffer,” he added.

Risks associated with project financing loans were one of the three economic challenges Korea faces, said the S&P Global.

The other two challenges were slowing demand of EVs, where a large number of Korean companies have invested heavily across the supply chain, and aggressive investment appetite by Korean firms, which could raise their debt.

These aspects could put a downward pressure on the country’s sovereign rating.

The S&P Global forecast Korea’s GDP to grow 2.2 percent and the consumer prices to accelerate 2.6 percent next year. It has kept Korea’s sovereign rating at AA with a stable outlook since 2016.

The credit appraiser noted Korea’s high household debt will unlikely affect the sovereign ratings.

Considering that Korea’s household debt level has remained high despite many years of restrictions by financial regulators proves that financial institutions can withstand the debt level, it said.

Korea’s household debt to GDP ratio was the highest level among 34 major economies in the first quarter, standing at 102.2 percent, which was distantly followed by Hong Kong at 95.1 percent.

But it noted risks associated with North Korea could make it challenging for Korea’s sovereign ratings to be upgraded to triple A.

A significant reduction of conflicts with North Korea and its globalization may ease Korea’s risks associated with North Korea, but it seems unlikely for such drastic changes to occur in the short run, according to S&P Global.

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