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Announcement:

Moody's says South Korea in strong position in face of rising tensions

Global Credit Research - 31 May 2010

Singapore, May 31, 2010 -- Moody's Investors Service says that South Korea's geopolitical defenses and economic fundamentals should prove strong enough to withstand a period of heightened tensions. The stable outlook on Korea's A1 rating remains appropriate.

Markets were alarmed last week by Pyongyang's bellicose rhetoric in reaction to the international investigation's conclusion that a torpedo fired by a submarine belonging to North Korea had sunk a South Korean warship on March 26.

"Overall, recent shocks -- including the sinking and the deaths of 46 South Korean sailors near the maritime border between both countries -- have had no adverse effects for South Korea on the issues of debt affordability or finance-ability," says Tom Byrne, a Moody's Senior Vice President. "Moreover, countries like South Korea, which have good fundamentals, will continue to look relatively attractive in global markets."

"After the results of the investigation were released on May 20 and tensions increased, South Korea's foreign exchange and equity markets began to experience some very large swings last week, but overall these gyrations are proving to be credit neutral," says Byrne.

"However, during Thursday and Friday (May 27-28) last week, the Korean won rebounded by 5%, its biggest two-day gain for more than a year, to stand at 1,195 won versus the dollar. Meanwhile, the country's official foreign-exchange reserves of about $280 billion -- partly the result of moves by Seoul to build up its buffers against external shocks following the Lehman collapse in 2008 -- remain in a historically high range, and despite foreign sell-offs on the equities market," says Byrne.

"Furthermore, 10-year government bond yields over the past two months and through last week have stayed below 5%, lower than the beginning of the year, and about 1.6% above the equivalent US Treasury bond, thanks in part to continued foreign buying," says Byrne.

"Foreign investors have been reassured by Seoul's intention to respond to Pyongyang's bellicose rhetoric through diplomatic channels rather than militarily. At the same time, Seoul is enhancing its defense posture through its security alliance with the US. This relationship has emerged more robust than ever after stress during the previous South Korean administration and its pursuit of its so-called Sunshine Policy towards the North," says Byrne.

"Looking ahead, China's diplomatic role could be critical in ratcheting down tensions if it can restrain North Korea's aggressive behavior, But, Beijing will have to balance its desire for stability on the Korean peninsula with its support -- direct, implicit and strategic -- of Pyongyang. Geopolitical risks will stay heightened if the two objectives prove mutually exclusive and if China's strategic ambiguity emboldens rather than restrains Pyongyang," says Byrne.

From a macro-economic perspective, South Korea's position -- as indicated -- looks strong. Its export industries are more competitive than ever, keeping its external current account balance in surplus.

Furthermore, companies such as those in the information technology and automobile industries -- after helping the economy avoid a recession in 2009 -- are now placing it on a path of robust recovery: the economy expanded 1.8% in the first quarter of 2010, helping to boost GDP 7.8% higher than the first quarter of 2009, and government finances stay sound with low deficits and moderate levels of debt.

Despite the rise in tensions, likely tightening of existing sanctions and the chill in limited inter-Korean economic exchanges, neither Pyongyang nor Seoul have shut down their largest project—the Kaesung joint industrial zone.

Nonetheless, Moody's considers that provocative actions from Pyongyang may continue against a backdrop of leadership succession and economic disintegration in the North.

The principal methodology that Moody's uses in rating the Republic of Korea is its Sovereign Bond Ratings Methodology published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodology sub-directory on Moody's web site.

Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (65) 6398-8308

New York
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's says South Korea in strong position in face of rising tensions
No Related Data.
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