Moody’s: No big change in Korea’s outlook

Credit rating agency says its outlook for Korea’s banking system remains stable


There have been no fundamental changes in Korea’s economic prospects since Moody’s Investors Service raised its outlook for the country in April amid the European debt crisis, a senior vice president for the company in Asia said Tuesday.

“Nothing fundamental has changed since we raised the outlook,” Tom Byrne, senior vice president of Moody’s sovereign risk group for Asia, told reporters here.

“The drop in demand from Europe, however, would hurt exports for countries such as Korea and other regions in the near term.”

Relatively strong growth and fiscal fundamentals in Asia’s fourth largest economy provide the basis for improvement in its credit profile, Byrne said, adding that the Korean government debt trajectory remains favorable.

Continued policy vigilance is necessary, however, in managing nonfinancial public sector corporation debt, containing leverage of households and reducing further vulnerabilities in external banking sector market funding, he said.

After Moody’s raised its outlook for Korea from stable to positive on April 2, the Bank of Korea cut its growth forecast for this year to 3.5 percent from 3.7 percent as the European crisis deepened.

Moody’s also said its outlook for Korea’s banking system will remain stable over the next 12 to 18 months, although contagion from the euro area remains the biggest risk.

“We expect a relatively stable operating environment that will support the asset quality of the banks and loan demand, despite headwinds in the global economy,” said Choi Young-il, Moody’s vice president and senior credit officer.

“Korean banks are better prepared than they were at the time of the Lehman shock, but we assess them as more vulnerable to the first-round impact of a further worsening of the euro area crisis when compared with many peers in Asia as they heavily depend on wholesale funding in foreign currency.”

According to Moody’s outlook report on Korea’s banking system released last week, while Korea’s economic growth is highly correlated with the growth rate of the global economy, it is considerably higher than that of other advanced economies because the country’s export sector is competitive and diversified.

The government also has ample capacity to support the economy and the banks, if needed, underscored by Moody’s positive outlook for Korea’s A1 sovereign rating.

Moody’s banking system outlook assumes a slower yet comparatively robust rate of expansion of about 3 percent for the domestic economy in 2012 and 3.5 percent in 2013.

The growth rate this year will translate into loan growth of 5 percent, a level that would continue to support the credit profiles of the banks, the credit rating agency said.

Analysts of Moody’s Investors Service visited Korea this week as part of an annual review of the country’s sovereign credit rating to discuss with central bankers, government officials and regulators topics including mid- to long-term fiscal management and the effects of Europe’s debt crisis.

By Kim So-hyun (sophie@heraldcorp.com)