Standard & Poor’s has raised Korea’s sovereign rating by one notch to AA from AA-. The upgrade is surely welcome news, but it should not lead to complacency.
The rating S&P awarded to Korea, which is the third highest on the agency’s rating table, is a record high for Korea. It is equivalent to the Aa2 rating that Moody’s Investors Service gave Korea in December 2015.
The upgrade places Korea on the same level as the United Kingdom, France and Belgium, and two levels higher than Japan. Only six countries in the world have a higher rating. They include advanced economies the United States, Germany, Canada and Australia.
As the rationale for the upgrade, S&P cited “Korea’s steady economic growth, greater fiscal and monetary flexibility and continual improvements in external metrics.”
The agency estimated Korea’s real per capita gross domestic product growth this year at 2.6 percent, saying it was higher than the typical 0.3-1.5 percent range for most high-income countries.
Referring to Korea’s lackluster exports in 2016, it said the nation’s export performance has not been out of line with those of other economies in the region.
The agency also stated that Korea’s monetary policy, healthy fiscal position and large trade and current account surpluses helped it get a rating upgrade.
The improved rating will benefit Korea as it will contribute to stabilizing the local financial market amid increasing external uncertainties stemming from Britain’s exit from the European Union, a possible U.S. rate hike and China’s economic slowdown.
It will also benefit Korean corporations and financial institutions by lowering their overseas borrowing costs.
Yet the upgrade does not necessarily mean that the Korean economy is booming. In fact, it comes at a time when the economy is sinking deeper into a slump.
The Korean economy faces problems on all fronts. The continuing contraction in exports still shows no signs of reversal. To make matters worse, Korea’s currency is gaining value these days, threatening to further curb exports.
Korean corporations are losing global competitiveness amid the rise of Chinese companies. As a result, a growing number of Korean corporations are suffering downgrades in their credit ratings.
The household sector is not in good shape either, as demonstrated by the ever rising household debt.
As the economy has been mired in a prolonged slump, the government has sought to prop it up by increasing fiscal spending.
The sovereign rating upgrade will contribute to reducing Korea’s external vulnerability, but it should not be taken as an indication that the economy is performing well.
