South Korea’s Credit Rating Raised One Level to AA by S&P

  • Won gains, bonds pare back losses after S&P’s upgrade
  • Government says upgrade highlights economy’s stability

South Korea’s credit rating was increased one level by Standard & Poor’s, which cited the nation’s steady economic performance, sound fiscal position and flexible fiscal and monetary policies for the improvement.

S&P said Monday it raised the long-term credit rating for South Korea to AA from AA- with a stable outlook, the agency’s third-highest rating. This follows an upgrade to Aa2 from Moody’s Investors Service in December 2015, which marked the first time that South Korea received a third-highest ranking from a major ratings agency. Fitch Ratings ranks South Korea at AA-, the fourth-highest level.

The decision may bolster investors’ confidence in South Korea’s prospects at a time when a global economic recovery remains uncertain and credit ratings or outlooks for major countries like Australia, the U.K. and Japan have been lowered. South Korea’s won gained and bonds pared losses after S&P’s decision was announced. The country has a higher rating than neighboring China and Japan from all three international rating companies.

“Korea has exhibited stronger economic performance in recent years than most other high-income economies” S&P said in a statement. “The Korean economy remains well-diversified and is not dependent on a particular industry or export market.”

The Bank of Korea expects the economy -- Asia’s fourth largest -- to expand 2.7 percent this year, after growing 2.6 percent in 2015. Recent growth has been lower than what the central bank estimates as the nation’s potential rate -- about 3 percent to 3.2 percent.

To fend off risks from corporate restructuring, the BOK lowered its key interest rate to 1.25 percent in June, and the government announced 11 trillion won ($9.9 billion) of extra budget. The supplementary budget plan hasn’t yet been approved by parliament.

External Risks

S&P’s upgrade highlights the South Korean economy’s stability amid external risks including Brexit, the direction of U.S. interest rate policy and possible slowing in China’s economy, the finance ministry said in a statement on Monday. This will contribute to market stability, and lead to higher ratings for South Korea’s financial companies and public firms, helping lower funding costs, the ministry said.

S&P also cited risks including geopolitical tension on the Korean peninsula. The agency said it could lower the ratings if tensions related to North Korea escalate to a point that affects South Korean sovereign credit metrics.

North Korea recently launched a series of missiles, with the latest one landing for the first time in Japan’s exclusive economic zone. The communist regime has been threatening to retaliate over South Korea’s agreement to place a U.S.-operated missile-defense system on the peninsula. The decision to deploy the Terminal High-Altitude Area Defense system, or Thaad, was made to strengthen anti-missile defense capability against increasing nuclear and missile threats from its northern neighbor, South Korean and U.S. military officials said.

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