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Rating Action:

Moody's assigns Aa2 rating to Korea's global bond offering

13 Sep 2018

Singapore, September 13, 2018 -- Moody's Investors Service ("Moody's") has today assigned a Aa2 senior unsecured ratings to the Government of Korea's dual-tranche US dollar-denominated bond offering with maturities in 2028 and 2048. The ratings mirrors the Government of Korea's issuer rating of Aa2 with a stable outlook.

The bonds are direct, unconditional and unsecured obligations of the Government of Korea and will rank pari passu with all other senior unsecured debt obligations of the issuer.

RATINGS RATIONALE

Korea's Aa2 government rating reflects: (1) a large and diversified economy that will continue to demonstrate resilience to global shocks, (2) sound public finances that are further enhanced by ongoing implementation of structural reforms, and (3) the recent lowering of historical bilateral tensions with North Korea, although geopolitical risk remains elevated.

Moody's expects Korea's healthy real GDP growth to continue in the near term, supported by the still favorable—albeit slowing—outlook for external demand, accommodative fiscal policies, and robust consumption on the back of steady income growth. At the same time, rising global trade protectionism poses risks for trade-reliant economies such as Korea, while domestically, high levels of household debt could potentially adversely impact private consumption.

Over the medium term, Korea's growth potential is likely to slow as an aging 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.

Beside robust growth potential, Moody's expects Korea's economy to continue to show a high degree of resilience to shocks, including external shocks. The Korean economy's broad diversification, high level of competitiveness, and fiscal space mitigates its export dependency. Moreover, overall economic conditions are unlikely to be directly impacted by tightening global liquidity conditions or capital flow volatility on account of the country's very large external buffers.

Korea's public finances are characterized by its consistent fiscal surpluses on a consolidated basis (including the social security funds balance), moderate general government debt levels, low gross financing needs, very strong debt affordability, and very low shares of foreign-currency and external debt. Moody's expects Korea's debt burden to remain stable at around 40% of GDP over the next five years. Debt affordability will remain robust compared to highly-rated peers, anchored by both the comparatively low amount of debt and the Bank of Korea's strong track record of inflation management, which has kept domestic interest rates low and stable.

Developments since the beginning of 2018 have significantly lowered tensions that, in Moody's assessment, had raised the probability of military conflagration over the previous year. Following the spate of missile launches, nuclear test, and other demonstrations of its military capability in 2017, North Korea has stepped up its diplomatic engagement with the international community and Korea, in particular. Moody's assessment of the threat to Korea's profile posed by geopolitical risk remains "moderate". Even if the risk of armed conflict has ebbed, considerable uncertainties related to the peace process persist.

ISSUER RATING OUTLOOK

The stable outlook on Korea's sovereign issuer rating reflects Moody's view that credit strengths and challenges are balanced, with strong fundamentals offset by unusually pronounced exposure to event risk for a Aa-rated credit. Korea's credit fundamentals will remain strong under Moody's baseline scenario, and its fiscal and external buffers impart resilience to adverse shocks. However, longer-term credit constraints are predominantly centered on the administration's ability to implement structural reforms to maintain its strong economic performance and robust fiscal position against the background of a rapidly ageing society. The recent de-escalation of geopolitical tensions mitigates the persistence of the threat of armed conflict in the absence of a permanent peace settlement in the Korean peninsula. Any military conflagration would damage the economy, the functioning of the government and its finances, and potentially the country's payment system. The severity of the credit impact would depend on the duration and intensity of the conflict.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading Korea's sovereign rating if there was a material and irreversible reduction in geopolitical risk, and in particular a lowering of the threat of warfare on the Korean peninsula. 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. Further traction of economic and structural reforms that durably improve potential GDP growth and mitigate the adverse impact of an ageing population would also be credit positive.

Factors that would prompt a downgrade of 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 Korea's economic growth or its strong fiscal position; (2) a backtracking in ongoing structural reforms that would exacerbate the long-term negative impact from an aging population; (3) a large deterioration in government finances, including material crystallization of state-owned enterprise debt or other contingent liabilities, that renders Korea's fiscal strength materially lower.

This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related economic statistics included in rating announcements published after June 3, 2013.

This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related summary rating committee minutes included in rating announcements published after June 3, 2013.

The principal methodology used in this rating was Sovereign Bond Ratings published in December 2016. 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
VP - Senior 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
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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