South Korea saw its debt rating boosted for a third time in less than three weeks, spurring the won to its highest level against the dollar since March.
The sovereign rating was upgraded one step to A+, the fifth-highest, by Standard & Poor’s, on a par with Chile and one level below China, Japan, Taiwan and Saudi Arabia. Fitch Ratings has South Korea at AA- and Moody’s Investors Service at Aa3, both the companies’ fourth-highest level, after their upgrades.
The won rose after the upgrade, extending gains following the U.S. Federal Reserve’s decision to begin a third round of quantitative easing to spur growth. Further strengthening may add to pressure on the Bank of Korea, which yesterday unexpectedly left interest-rates unchanged, to add stimulus as Europe’s debt crisis curbs South Korean exports of cars and electronics.
“This is positive for Korean government bonds and suggests more capital inflow into Korea,” said Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd. “Combined with quantitative easing in the U.S., this will likely add appreciation pressure on the Korean won. The Bank of Korea will cut rates in October.”
The won strengthened 1.0 percent to 1,117.30 per dollar as of 3:13 p.m. in Seoul, the biggest jump since May 28 and the strongest level since March 2, according to data compiled by Bloomberg. The yield on the government’s 3.25 percent bonds due June 2015 fell 2 basis points to 2.86 percent, after earlier climbing as much as four basis points to 2.92 percent, Korea Exchange Inc. prices show.
South Korean policy makers are weighing calls for more stimulus with signs of resilience such as unemployment at an eight-month low. The Finance Ministry announced 5.9 trillion won ($5.3 billion) of spending and tax relief this week while resisting calls for a budget increase.
The Bank of Korea unexpectedly held borrowing costs at 3 percent yesterday as it opted to preserve policy room in the event of a deeper global slowdown. The central bank instead said it will boost by 1.5 trillion won its loan program to help small businesses refinance debt at a lower interest rate.
“Korea is apparently doing well on fiscal soundness and economic resilience, when many others are suffering rating cuts,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “The rating upgrade should increase foreign investors’ appetite for Korean assets.”
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.
The S&P upgrade may not lead to foreign capital inflows because it merely confirms what the market “has known for a long time,” according to Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Group PLC. “People have been looking for a safe haven since 2009.”
South Korea’s upgrade reflects reduced geopolitical risk on the Korean peninsula following a “smooth” leadership change in North Korea, S&P said in a statement today. The transition reduces the risk of military confrontations, the statement said.
“The Kim Jong Un regime stabilized sooner than the world had expected it to,” said Dong Yong Sueng, senior fellow who specializes in North Korean economy at Samsung Economic Research Institute in Seoul. “That provides for a positive outlook for the entire peninsula.”
Still, S&P said it expects South Korea’s economy to be “relatively weak in the next one to two years” as the global economic slowdown weighs on companies.