South Korea’s public finances are no longer a “strength” for its credit rating, Fitch says

By Jihoon Lee

SEOUL (Reuters) – South Korea’s public finances have moved from being a mainstay of government bond credit to being a neutral factor requiring short-term efforts to control rising debt levels, the global ratings agency said Fitch.

“We have seen a slight deterioration in public finance data over the last five to six years,” Jeremy Zook, director of Fitch Ratings’ Asia-Pacific region, said in an interview with Reuters on Thursday.

“And that is more on a basis relative to peers. Before the pandemic, Korea’s debt-to-GDP ratio was much lower than the median of AA-rated countries, but now it is right in line with the AA median.”

When Fitch last month affirmed South Korea’s credit rating at “AA-” with a stable outlook, the country expected its public debt ratio to rise to 51.4% of gross domestic product (GDP) in 2024, higher than the median of 48 .5% for the country. Countries with an “AA” rating, and up to 53.6% in 2028, which deviates from the downward trend forecast for the “AA” median.

“It is not a weakness for Korea’s credit profile, but it is no longer a strong rating for Korea. It is more neutral,” Zook said, adding that budget figures have become more important in assessing South Korea and are closely watched by the credit rating agency.

Prudent fiscal spending had been a strong credit profile for Asia’s fourth-largest economy and helped lift its rating to the same level as Britain, France and Belgium, but the pandemic-era stimulus policy has pushed the debt-to-GDP ratio sharply increase to 50.4% in 2023 from 35.9% in 2018.

“Our view for some time has been that maintaining a lower debt ratio in the short term is important for Korea to manage some longer-term risks,” Zook said, citing aging as the biggest structural challenge.

Since her inauguration in May 2022, South Korea’s conservative government, Yoon Suk Yeol, has prioritized fiscal sustainability.

But fiscal consolidation could now be “a little bit more gradual after the election,” Zook said, referring to this month’s parliamentary elections in which the opposition Liberal Party won a landslide victory.

The opposition Democratic Party is urging the government to prepare a supplementary budget for a universal cash handout program distributing 250,000 won ($181.96) per person to boost domestic demand. The government is against this step.

Zook said the cash handout proposal, if implemented, risks making inflation more persistent and could impact the Bank of Korea’s monetary policy.

South Korea’s economy grew at its fastest pace in more than two years in the first quarter, exceeding market expectations, thanks to a recovery in domestic consumption and robust exports.

The economy is expected to grow 2.1% in 2024 after growing 1.4% in 2023 to a three-year low, but “there are upsides to this forecast after the GDP figure ” said Zook.

On monetary policy, Zook said strong GDP data could push back rate cuts “only slightly,” while maintaining his projection of two 25 basis point cuts in the second half of the year from the current 3.50 %, the highest since late. 2008.

($1 = 1,373.9500 won)

(Reporting by Jihoon Lee; Editing by Jamie Freed)