Singapore, April 02, 2012 -- Moody's Investors Service has today changed the outlook on the Republic
of Korea's A1 government bond rating to positive from stable.
The key drivers of the rating action are:
1. The sovereign's very strong and improving fiscal fundamentals
2. The resilience evident in the country's external financing
position
3. The reduction in the banking sector's level of external
vulnerability
4. The outlook for relatively strong trend GDP growth over the
medium term
RATIONALE FOR THE POSITIVE OUTLOOK
Korea's fiscal fundamentals are very well placed among its like-rated
advanced and emerging economy peers. Its fiscal fundamentals have
withstood the global financial crisis, as well as the ongoing eurozone
crisis and the drag in global growth.
The government budget swiftly bounced back into surplus in 2010 and remained
in the black in 2011. Government debt has been contained at a moderate
level in relation to GDP, while the global financial crisis and
recession did not result in any fiscalization onto the government's
balance sheet of financial or nonfinancial public-sector contingent
liabilities.
Moreover, the outlook for government finances is favorable.
Relatively low inflation, a low risk premium on government securities
and a relatively strong outlook for economic growth mean that fundamental
pressures on government debt capacity are remarkably absent.
The above factors are reflected in Korea's very low gross financing
requirement, which is among the lowest for an advanced or emerging
market economy. Over the medium term, Moody's sees
the government's debt trajectory declining. This assessment
is also confirmed by those made by the International Monetary Fund through
to 2016.
At the same time, the vulnerabilities exposed during the height
of the global financial crisis -- namely, the banking
system's reliance on off-shore dollar funding --
are being effectively addressed. Macro-prudential regulatory
measures have been introduced and have served to help reduce short-term
foreign currency exposures among the banks and therefore lessen,
to some degree, the risks arising from the banks' relatively high
loan-to-deposit ratios. Improved risk management
among the banks has also contributed to a reduction in such vulnerability.
And in contrast to the experience during the global financial crisis in
2008, Korea's external payments position has withstood the
pressures from the euro area and market risk aversion. Official
foreign exchange reserves increased in the past year through February
2012 to a record $316 billion, whereas during the global
financial crisis, they had plummeted to $201 billion.
Moody's rating concerns center on several issues in addition to
the external liquidity vulnerability of the banks. One such risk
is the rise in non-financial public-sector debt since 2007.
Although this development has not yet imposed any direct burden on the
central government's balance sheet, the impact of a possible extended
period of deterioration in public-sector corporate financials warrants
scrutiny. Much of the public-sector borrowing has gone to
supporting increased expenditure on infrastructure and social welfare,
in particular, affordable housing.
Offsetting the rise in broad, public sector debt, however,
is the continued strong growth in the National Pension Fund. Its
assets amounted to 27% of GDP at end-2011. The Fund
is projected to continue growing rapidly over the next decade or longer,
even though pressures from a declining work-force participation
rate and demographic trends will begin to emerge in the second half of
this decade. The Fund also serves to deepen the domestic capital
market, making public-sector debt more affordable.
Rising household debt is another concern. If unchecked, this
trend could impair bank asset quality and introduce a drag on private
consumption expenditure as an important source of GDP growth. Much
of household debt in Korea is held in variable interest rate instruments,
and is therefore vulnerable to inflation or interest rate volatility,
or both.
Lastly, North Korea-related event risks factored into our
Sovereign Bond methodology do not constrain South Korea's rating
at the A1 level. Our assessment is that, fundamentally,
geopolitical risks have not changed under the new, dynastic leadership
in Pyongyang. Such risks are counterbalanced by the strong deterrence
provided by Seoul's robust alliance with Washington, and also
by the shared interests among regional powers for stability on the peninsula.
In this regard, the role of Beijing, with whom Pyongyang has
close political and economic relations, seems pivotal.
That said, unknowns surrounding the future costs of engagement with
or a resuscitation of the North -- in a scenario in which
the regime collapses or unification looms -- argue that
the South should maintain ample fiscal and financial headroom to meet
various contingencies, as unlikely as they currently appear,
and as difficult as they are to predict and quantify.
The change in outlook to positive from stable also affects the Aa2 foreign
currency bond ceiling and A1 foreign currency bank deposit ceiling.
The P-1 rating on short-term obligations remains unchanged,
as does the Aa1 ceiling on local currency bond and bank deposit ratings.
CREDIT TRIGGERS FOR A FUTURE RATING ACTION
Factors that could lead to a ratings upgrade:
1. Continued economic and fiscal resilience to the global economic
headwinds
2. An assessment that the growth in non-financial public-sector
debt and other contingent liabilities will not undermine the government's
balance sheet
3. Containment of the banking sector's external funding vulnerability
4. Maintenance of an overall policy framework favorable for growth,
investment and employment
5. Absence of any significant elevation in event risks associated
with the North
Although unlikely given the positive rating outlook, factors that
could lead to a change in the outlook to stable or a negative rating action
include:
1. An assessment that the rapid run-up in contingent,
public-sector debt will undermine the government's balance sheet
2. Substantial deterioration in the banks' external funding
positions
3. A significant elevation in military tensions on the Korean peninsula
PREVIOUS RATING ACTION & METHODOLOGY
The last rating action on the Government of Korea was on April 14,
2010, when its government bond ratings were raised to A1 from A2.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
Press releases of other ratings affected by this action will follow separately.
REGULATORY DISCLOSURES
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has
issued the rating.
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
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Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Moody's changes outlook on Korea's A1 rating to positive
