Global rating agency Moody’s upgrading of Korea’s sovereign credit rating last weekend could not have come at a better time for the nation.
Moody’s on Saturday raised Korea’s sovereign rating by one notch from “Aa3” to “Aa2,” the highest-ever rate Korea has received from an international rating agency.
“Aa2” is the third-highest class in Moody’s rating system. Among the G20 countries, only seven other countries, including the United States, Germany and Canada, have been given “Aa2” or higher ratings.
The rating upgrade came amid growing concern about the negative impact the recently announced U.S. interest rate hike could have on the Korean economy.
Moody’s alleviated the concerns that investors might have about the Korean economy by clearly affirming its strong fundamentals and ability to weather external challenges.
One key driver of Moody’s rating decision is Korea’s robust credit metrics, including its strong outlook for economic growth and government finances.
The rating appraiser particularly noted that Korea’s external vulnerabilities were diminishing, as reflected in the continued rise in its net asset international investment position, the small size of its total external debt relative to its gross domestic product and the fall in its short-term foreign debt.
It stated that these characteristics together would provide a strong buffer in the event of an unexpected domestic or external shock.
Moody’s positive analysis of Korea’s credit metrics helps investors see more clearly how Korea differs from other emerging market economies. It is hoped to serve as an antidote to their worries that the U.S. central bank’s rate hike might push Korea into trouble.
While highlighting Korea’s strong fundamentals, Moody’s also noted the need for the Korean government to follow through on its plan to carry out structural reforms.
Referring to Korea’s strong track record of successfully implementing reforms, the rating agency gave high marks to the Korean government’s push for a comprehensive reform program, encompassing the public sector, labor market, financial system and education sector.
It noted that this program was still in its early stages, but nevertheless expressed confidence that the broad objectives of the program would be achieved. It is partly this confidence that has led the agency to upgrade Korea’s sovereign rating. Moody’s said clearly that Korea could suffer a rating downgrade if it backtracks from its commitment to structural reforms.
Currently, the government has difficulty implementing the reform program as some of its reform bills are held up in the National Assembly. The ruling and main opposition parties have been unable to narrow their differences over these bills. The Moody’s rating action has clearly shown them what the result would be if they fail to pass the bills through the Assembly. They should hurry to wrap up their deliberations on them.
