Korea’s Rating Raised by Moody’s on Resilience to Shocks

South Korea Rating Raised by Moody’s on Resilience to Shocks
The won was down 0.1 percent at 1,134.90 per dollar as of 12:22 p.m. in Seoul, after earlier falling as much as 0.3 percent, data compiled by Bloomberg show. Photographer: SeongJoon Cho/Bloomberg

South Korea’s sovereign debt rating was raised by Moody’s Investors Service to a par with Japan’s after Asia’s fourth-largest economy strengthened its resilience to crises.

“Korea’s strong fiscal fundamentals enable a relatively large degree of policy space to cope with contingent domestic risks and external shocks,” Moody’s said in a statement today. The company elevated South Korea one step to Aa3, the fourth-highest ranking and one also shared with China.

The upgrade is a vote of confidence in President Lee Myung Bak’s efforts to strengthen the nation’s ability to cope with financial turbulence even as his popularity wanes ahead of the end of a five-year term. The move also reflects South Korea’s fiscal discipline, with government debt at 33 percent of gross domestic product, against 108 percent for advanced economies as a whole, according to the International Monetary Fund.

“The fiscal situation is the strongest aspect of Korea’s economy,” said Lim Ji Won, an economist at JPMorgan Chase & Co. in Seoul. “A lot depends on how the government deals with the aging problem in the longer term, but in the next few years the fiscal situation will be relatively strong.”

Like Japan, South Korea’s population is aging after its birth-rate declined, potentially imposing a higher pension-cost burden on the economy as fewer workers support greater numbers of retirees.

Bond Yields

South Korean sovereign credit default swaps fell two basis points to 104 basis points as of 1:52 p.m. in Seoul, according to prices from Royal Bank of Scotland Group Plc. The gauge has declined from 117 basis points at the start of the month, according to data provider CMA.

The yield on 3.25 percent government notes due in June 2015 declined two basis points to 2.82 percent, the lowest since Aug. 10, Korea Exchange Inc. prices show.

Bond-market history indicates that the utility of sovereign ratings may be limited. Almost half the time, yields on government bonds fall when a rating action by S&P and Moody’s Investors Service suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.

After S&P stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose.

Fitch, S&P

Fitch Ratings has South Korea at A+ for its foreign-currency, long-term debt, the fifth-highest rating. Standard & Poor’s ranks the nation one level lower, at A.

Export competitiveness will help the nation to rebound from a slowdown as global growth recovers, Moody’s said. The nation’s banks have been strengthened by improved regulation and a reduction in reliance on short-term external financing, it said.

The risk of a collapse in North Korea during the transition to a new leadership “is diminishing,” Moody’s also said today. Kim Jong Un in December became the third generation in his family to lead the North since its formation after World War II, with little public sign of resistance to the succession.

“The North Korean risk is and will always be there, but it seems the risk is increasingly known and stabilized,” said Kim Yong Hyun, a professor of North Korean studies at Dongguk University.

Any eventual reunification with North Korea, which has relied on foreign aid to feed itself, could pose a fiscal hit to the South, Lim said.

Emerging Economies

Today’s move by Moody’s underscores an appeal to the country that Goldman Sachs Group Inc. has highlighted as an alternative to investing in the so-called BRIC nations.

Jim O’Neill, chairman of Goldman Sachs Asset Management, who coined the term BRIC for Brazil, Russia, India and China, is using MIST for Mexico, Indonesia, South Korea and Turkey -- nations he considers to be among the next big 11 emerging markets.

South Korea “happens to be the only populated country that in my lifetime has transformed its income from that of an African country to being that of a G-7 country,” O’Neill said before today’s announcement. “It’s an example that all these other countries can learn from.”

Lee, 70, made strengthening the international financial safety net a priority of South Korea’s leadership of the Group of 20 nations during its tenure in 2010. He has also overseen an expansion in currency swaps agreements with Japan and China in recent years.

A former chief executive officer of Hyundai Engineering & Construction Co., Lee has seen support slide since his 2007 victory after failure to deliver on a campaign pledge to boost wage growth and an aborted effort to enact a second round of tax cuts in three years for the chaebol, as the nation’s industrial groups are known. He’s constitutionally barred from seeking re-election.

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