Even peaceful unification would raise risks: S&P

Credit rating agency reaffirms Korea sovereign rating


Credit rating agency Standard & Poor’s projected a bleak view for the Korea in a post-reunification scenario, predicting that the government would suffer heightened policy risks even under peaceful circumstances.

In its annual seminar in Seoul, the credit rating agency estimated the balance of the unified government to swing into a deficit, assuming reunification took place in early 2012. It estimates the government’s net surplus of about 2 percent of GDP this year to immediately swing to deficit of about 3 percent of GDP next year.

This deterioration of fiscal status will lead to one to three notches of credit downgrading, equal that of Malaysia, or even Russia and Mexico in the worst case scenario.

S&P reaffirmed Korea’s current sovereign rating as “A,” two notches below Japan and China.

“Of course, this is our forecast for an exceptional scenario, we expect the unified government to log deficits and here we’re talking about consolidated central government balance,” Kim Eng Tan, senior director in sovereign ratings said.

He called deficit of 3 percent of GDP in the first year of post-reunification still an “optimistic one, because the economic disparity between North and South is huge.”

In its hypothetical scenario of Korea’s political landscape, S&P said the country’s security risks would be greatly reduced should the two proceed with a “peaceful reunification.” It however stated that political uncertainties would remain even under that scenario regarding management of the 20 million “new” citizens. It also said policy making could become less predictable or consistent compared to South Korea’s current system.

Ritesh Maheshwari, head analyst for financial services ratings in Asia Pacific, said outlook for most Korean banks are stable.

“This indicates we don’t plan these banks’ credit ratings to go down, or up in the short term,” Maheshwari said.

Some of weaknesses he pointed out are the local industry’s high level of household indebtedness, exposure to construction companies and real estate project finance loans as well as foreign currency liquidity risk.

“But 2011 is a good year for the industry in general, banks here are generally adequately capitalized and their profits are increasing,” he added.

By Cynthia Kim (cynthiak@heraldcorp.com)