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Rating Action:

Moody's affirms Korea's Aa2 rating, maintains stable outlook

 The document has been translated in other languages

12 May 2020

Singapore, May 12, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Korea's long-term issuer and senior unsecured ratings at Aa2 and maintained the stable outlook. The (P)Aa2 senior unsecured shelf ratings are also affirmed.

The drivers behind the rating affirmation and stable outlook include Moody's assessment of Korea's strong governance and effective macroeconomic, fiscal and monetary management of shocks, as illustrated during the coronavirus outbreak. Moody's expects Korea to maintain robust growth potential and strong fiscal and debt metrics relative to similarly-rated sovereigns, through the current and potential future shocks.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. For Korea, the main channels of exposure stem from its reliance on export-oriented manufacturing, its participation in regionally dispersed supply chains and the consequent spillovers to domestic consumption and investment. However, Moody's expects that the damage to the economy will be contained and the government's fiscal and debt position will not weaken materially when compared to similarly-rated sovereigns.

Over the longer term, Korea faces a rapid ageing of its population which will weigh on growth and raise the government's debt burden, although likely not to the same extent as for similarly-rated sovereigns. The Aa2 rating also takes into account lingering geopolitical risk given the lack of progress towards a lasting peace settlement with North Korea.

South Korea's long-term foreign currency bond ceiling remains unchanged at Aa1. The foreign-currency deposit ceiling remains at Aa2, while the local-currency bond and deposit ceilings remain at Aaa. The short-term foreign-currency bond and deposit ceilings remain unchanged at P-1.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aa2 RATING

EXECUTIVE AND POLICY INSTITUTIONS' TRACK RECORD OF EFFECTIVE RESPONSE TO SHOCKS

While the Korean economy is exposed to shocks that affect global trade, the sovereign's executive and policy institutions have a track record of effective responses that preserve robust growth potential and sound public finances. Moody's expects this track record to be maintained in the current shock triggered by the coronavirus pandemic and potential future shocks.

In the current environment, the government's effective containment efforts have preempted the need for a lockdown, while paving the way towards a normalization of domestic economic activity sooner than other advanced economy peers. In addition, a comprehensive fiscal, monetary and regulatory response will cushion the negative spillovers from the deterioration in external demand, especially among Korea's largest trade partners. Although Moody's forecasts Korea to record its first economic contraction since the Asian financial crisis this year, it will be less severe than all other advanced G20 economies.

The countercyclical fiscal response reflects Korea's robust fiscal position heading into the current crisis. General government budget balances, including net receipts of social security funds, have typically been in or near surplus for much of the past decade, contributing to a low stock of debt relative to similarly-rated advanced economy peers.

Over at least the next two to three years, Moody's does not expect general government fiscal balances to return to a surplus position in light of budgetary support to aid the recovery from the coronavirus outbreak and the government's ongoing policy emphasis towards more inclusive growth. Nevertheless, Moody's projects government debt to remain contained at less than 45% of GDP, preserving Korea's high fiscal strength.

LONG-TERM ECONOMIC AND FISCAL IMPACT OF AGEING ON PAR OR LESS SEVERE THAN IN OTHER ADVANCED ECONOMIES

Over the medium term, Korea's growth potential is likely to slow as an ageing population leads to declines in the working age population. Moody's expects that these effects will be partly offset by comparatively strong productivity growth, supported by investment in innovation so that Korea's potential growth is likely to remain robust as compared to other advanced economies.

Similarly, while the government's finances will be negatively affected by increasing spending on healthcare and provisions for the elderly, Korea has as much--and in some aspects, more--flexibility to respond to the gradual pressure and mitigate the impact on its balance sheet.

GEOPOLITICAL RISK LINGERS

Notwithstanding strong credit fundamentals, Korea's credit profile continues to be constrained by its exposure to event risk, reflecting the ongoing very low probability but big impact risk of a military confrontation with North Korea amid the ebb and flow of tensions on the Korean peninsula.

Tensions have neither escalated nor meaningfully abated in recent years. The resumption of weapons testing since last year and the dire economic situation resulting from the continued diplomatic isolation of North Korea point to a non-negligible threat to the status quo.

RATIONALE FOR THE STABLE OUTLOOK

The stable rating outlook reflects limited risks to Korea's credit profile. Korea's credit fundamentals will remain exposed to material and long-lasting impediments to global trade and/or a structural slowing in China. Longer-term credit constraints for the sovereign are predominantly centered on the government's ability to implement structural reforms to maintain its strong economic performance and robust fiscal position against the background of a rapidly ageing society. In the context of either acute economic shocks or long-term ageing trends, Korea's credit metrics are likely to be as resilient as similarly-rated sovereigns.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are not material to Korea's credit profile. Given Korea's large industrial sector, a number of sectors are susceptible to carbon transition risks, including automobiles, steel, and shipbuilding, that could dampen the long-term outlook for economic growth; however, Moody's expects that the transition will be gradual, allowing the relevant industries to adjust without incurring significant loss of competitiveness. In addition, Korea is exposed to natural disasters, primarily typhoons and flooding. As in other highly-rated advanced economies, Korea's economic diversification and the strength of the country's institutions provide significant capacity to absorb these shocks.

Social considerations are material to Korea's credit profile. Population ageing and a shrinking domestic working-age population weigh on potential growth, while threatening large increases to healthcare and pension-related spending that will exacerbate the government's debt burden if unaddressed. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety; in this context, Korea's strong health care system and the effectiveness of its proactive containment measures mitigate related risks to its credit profile.

Governance considerations are material to Korea's credit profile and underpin the affirmation of the Aa2 rating. Effective governance underscores the government's capacity to respond to shocks, imparting resilience to economic growth and macroeconomic stability. Assessments of rule of law, control of corruption and regulatory quality consistent with other developed economies underscore Korea's sound governance framework, although policymaking institutions, have shown limited progress on mitigating the effects of Korea's ageing population, such as the erosion of potential growth.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

Economic and structural reforms that were increasingly likely to durably improve potential GDP growth and mitigate the adverse impact of an ageing population could lead to an upgrade.

Moreover, a material and irreversible reduction in geopolitical risk, and in particular a lowering of the threat of warfare on the Korean peninsula would also support a higher rating. Such a development would likely involve significant and tangible steps to be taken towards denuclearization and a permanent peace settlement between South and North Korea, as well as towards an ending of North Korea's economic and diplomatic isolation.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Factors that would prompt a downgrade of South Korea's sovereign rating include: (1) a heightening of geopolitical risks, such as escalating tensions that would increase risks of an outbreak of military conflict on the Korean peninsula and/or the collapse of the North Korean regime, that would in turn threaten South Korea's economic growth or its strong fiscal position; (2) a much deeper and more sustained damage to the economy from global or domestic shocks that lead to a severe structural impairment of potential growth; (3) a large deterioration in government finances, including material crystallization of state-owned enterprise debt or other contingent liabilities, that materially lowers South Korea's fiscal strength.

GDP per capita (PPP basis, US$): 43,290 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.7% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.3% (2018 Actual)

Gen. Gov. Financial Balance/GDP: 1.6% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 4.5% (2018 Actual) (also known as External Balance)

External debt/GDP: 25.6% (2018 Actual)

Economic resiliency: aa2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 06 May 2020, a rating committee was called to discuss the rating of the Korea, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength have materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
Senior Vice President
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
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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