Tuesday, May 16, 2017

Announcement: Moody’s: Korea’s Credit Strengths Offer Resilience Through External Tensions and Challenges of Domestic Reform

Moody’s Investors Service says that the election of Moon Jae-in as president of Korea (Aa2 stable) clears away much of the country’s political uncertainty, but his new administration will still face major domestic and external challenges.

However, barring a major escalation of a range of interrelated risks, Moody’s expects the credit strengths of the sovereign, as well as Korean companies and banks to remain largely intact.

Moody’s conclusions are contained in its just-released report on Korea, “Credit Strength Amid Challenges, From Political Upheaval to External Tensions”.

The challenges faced by the new administration include tensions with China and North Korea, ongoing investigations involving the leadership of some chaebols, and uncertainty surrounding US trade policy and the US/Korea alliance. Along with rising corporate and household debt and pressures on industrial sectors already undergoing restructuring, these challenges are already reflected in Moody’s baseline assumptions.

A strong level of competitiveness and effective policymaking institutions support the outlook for economic growth which Moody’s projects at 2%-2.5% in 2017-18. Over the longer term, Korea’s growth potential will depend on the government’s ability to implement further structural reforms to mitigate population aging and slower productivity growth.

In Moody’s view, Korea’s very strong government balance sheet provides the fiscal space required to support the economy upon negative shocks — thereby mitigating some risks.

Moody’s expects that fiscal policies will remain anchored under the new administration, while there might be some policy shifts in some areas of structural reform, such as the labor market and social security. Although the government debt burden would likely edge up if the government intensifies its policy of targeted fiscal stimulus, Moody’s expects it to remain at manageable levels of about 40% of GDP.

Risks to fiscal strength would come from larger-than-expected fiscal costs in relation to corporate restructuring. An escalation of shocks would also test the government’s ability to implement effective policies.

In addition, the creditworthiness of rated companies will remain unchanged despite various challenges. Domestic political changes will have had a limited impact on the chaebols as they are managed by professional management teams. Government support for government related issuers will also likely remain broadly unchanged.

With the banking system, Moody’s does not believe that tensions with North Korea or the chaebol investigation will have immediate implications for the ratings of Korean banks.

However, rising uncertainty on trade at the macro level and higher household debt will be negative for corporate expenditure and consumer confidence, which will in turn weigh on the challenging environment now prevailing for Korean banks.

The outlook on the Korean banking system is currently negative, due to the deteriorating asset quality of loans to large corporates and this challenging operating environment.

Moody’s also notes that an intensification of the risks related to high household debt, corporate restructuring and external tensions could weigh on the credit profile of Korean issuers if a number of these risks were to materialize simultaneously. In particular, a combination of these pressures could challenge the resilience of Korea’s private sector and economy, as well as policymakers’ capacity to effectively implement measures to absorb shocks.

Nonetheless, although the risks that Korea faces could escalate and interact in a way that magnifies their effects, Moody’s believes that for the present, this possibility seems remote.

The material has been provided by InstaForex Company –

May 16, 2017 at 08:14AM