South Korea’s debt rating was upgraded by Fitch Ratings to AA-, the same as Saudi Arabia and one level higher than Japan and China, 10 days after a similar move by Moody’s Investors Service.
“It is an important vote of confidence for Korea’s safe haven status, which could strengthen the appreciation bias of the Korean won,” said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore. “We expect more inflows from sovereign wealth funds.”
The decision yesterday is the second in less than two weeks to cite South Korea’s relatively strong position to cope with financial turbulence. South Korea’s sovereign debt rating was raised by Moody’s one step to Aa3 on Aug. 27, the same ranking as China and Japan, citing the country’s “strong fiscal fundamentals” that allow room to cope with domestic risks and external shocks.
“Two out of three major credit rating agencies moved Korea up when so many have been downgraded in Europe,” said Jun Min Kyu, an economist at Korea Investment & Securities Co. “This raises the possibility of S&P to follow.”
While Moody’s and Fitch now have South Korea on their fourth highest rating, Standard & Poor’s ranks the nation at A, its sixth highest.
The won has strengthened 0.1 percent since the Moody’s upgrade, to 1,133.85 yesterday. The Fitch upgrade was announced after local financial markets closed.
“The upgrade reflects Korea’s continued economic and financial stability in a volatile global environment and a strong macroeconomic policy framework including sustained fiscal discipline,” Fitch said in yesterday’s statement. “It also takes into account strong structural fundamentals including an income level and social and political stability that are not out of line with the ’AA’ rating range.”
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.