Geopolitical risks hold back South Korea's credit rating upgrade:Fitch

Fitch said that South Korea's "AA-" sovereign rating, which has remained steadfast over 10 years, could be adjusted upward if geopolitical issues such as inter-Korean relations and US-China conflicts are improved, during the 2023 Fitch on Korea seminar held in Seoul on Friday.

While improved relations with North Korea are necessary for a positive rating adjustment, Fitch does not see that improvement as promising in the near term, said Jeremy Zook, Fitch's director of Asia-Pacific sovereign ratings, during the seminar titled "Navigating the Headwinds," hosted by Fitch at the Westin Chosun Seoul.

The US-China conflict was also mentioned as a geopolitical risk for Korea.

Zook said that South Korea is deeply involved in various economic aspects with China.

"We do think, especially in the semiconductor sector, which has been a key focus for the US in terms of the relationship with China, that (US-China conflict) will be a sort of fine line for the Korean government to walk over the coming years," he said.

On Tuesday, Fitch announced it had maintained South Korea's national credit rating at AA- with a "stable" outlook.

Fitch has maintained this rating since upgrading it from A+ to AA- in September 2012. Other countries that rated AA- include the UK, Belgium and Hong Kong. Korea's rating is higher than those of both neighbors China (A+) and Japan (A).

Zook also spoke about what the stable outlook means. "We have the outlook on stable, which implies that we don't see the possibility of a change up or down over a two-year horizon."

Meanwhile, Kang Cheol-gu, head of Korea Rating's financial institution division, expressed concern about the credit rating outlook for domestic financial institutions during the seminar on Friday.

In particular, Kang highlighted the risk of real estate project financing causing problems next year.

He noted that most bridge loans for project financing at specialized credit finance companies, security firms and savings banks are reaching the end of their two-year terms at the end of this year.

A project financing bridge loan serves as a short-term financing solution to fund the initial phases of a real estate development project. These loans are commonly used to cover expenses related to land acquisition and site preparation and to obtain construction permits.

Project financing bridge loans are typically repaid with the proceeds of a permanent project financing loan, which is a long-term loan to finance the construction and completion of a real estate project.

"Typically, the period for transitioning from PF bridge loans to permanent PF loans is as short as one year, or usually 1 1/2 years," Kang said. "If it exceeds two years, it means that the business is not profitable."

Kang sees that major banks with permanent project financing loans do not face a significant risk of default.