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Fitch, Moody's warn prolonged political turmoil will hurt Korea's economy

Published: 06 Dec. 2024, 18:50 Updated: 06 Dec. 2024, 18:55

SHIN HA-NEE
[email protected]

Korean President Yoon Suk Yeol speaks in an unannounced press conference at the Yongsan presidential office in central Seoul Tuesday night. [YONHAP]

Fitch Ratings, one of the world’s largest credit rating agencies, expected that the ongoing political turmoil, if prolonged, may amplify downside risks for Korea’s sovereign credit rating.

While noting that the impact of President Yoon Suk Yeol’s emergency martial law declaration on the market has been limited, the firm suggested that political volatility may exacerbate downward pressure for the export-driven economy, which has already been facing a slowdown amid rising U.S. policy uncertainties.

In a release issued on Friday, Fitch said that the ongoing political uncertainties “will not materially and durably undermine institutional quality or threaten the economic and external finance credit strengths underpinning the sovereign’s AA-/Stable rating."

The financial market risks “appear manageable, with initial pressures on the exchange rate and financial conditions having eased following the swift rescinding of martial law and a proactive response from the Bank of Korea and Ministry of Economy and Finance,” noted the agency.

Korea’s previous two impeachment trials also did not impose major damage on the country’s sovereign credit profile, it said.

However, the credit agency also highlighted, “Downside risks would increase in the event of a protracted political crisis or if sustained political divisions erode policymaking effectiveness, economic outcomes or fiscal management.”

The martial law declaration, albeit short-lived, “could hurt investor perceptions of political risk,” noted Fitch, adding, “recent events also highlight stresses within the political system.”

The firm pointed out that the Korean economy already faces trade risks stemming from the incoming Donald Trump administration’s protectionist policy proposals, while also citing “widespread” labor strikes triggered by the martial law incident as a potential risk factor that may hamper economic activity.

S&P Global Ratings expressed a similar view, suggesting that the recent events could undermine investment sentiment for overseas companies.

Before the martial law declaration, "risk in Korea in that kind of [political] matter really wasn't on companies' minds," said Andy Liu, S&P Global Ratings' managing director of corporate ratings in the Asia-Pacific region, during a news conference in western Seoul on Wednesday.

"Given that it happened, it will probably cause some of the [corporations] to think about and re-evaluate supply chain risk, financial risk, policy risks," Liu suggested.

But the firm projected that the incident would not have an impact on the country’s sovereign rating.

Moody’s Ratings also expected that the ongoing political chaos will undermine the government’s administrative ability and function amid slowing growth potential, according to a Bloomberg report on Thursday.

BY SHIN HA-NEE [[email protected]]