Moody's revises up ROK's credit outlook to positive

SEOUL - Global credit rating agency Moody's said Monday it has raised its outlook for South Korea's sovereign credit rating "A1" to positive from stable.

According to an e-mailed statement, Moody's revised up its outlook for the country's government bond rating to positive from stable, affirming its rating at the current "A1". The credit rating was lifted up to "A1" from "A2" back in April 2010.

The move came 5 months after another credit appraiser Fitch revised up the outlook for South Korea's sovereign credit rating to positive from stable, citing strong external liquidity and sustainable fiscal balance.

Moody's attributed the outlook upgrade to strong fiscal fundamentals, resilient external financing position, reducing external vulnerability in the banking sector and relatively strong economic outlook.

The rating agency said in a statement that "the nation's fiscal fundamentals are very well placed among its like-rated advanced and emerging economy peers" as seen in successfully withstanding the global financial crisis as well as the ongoing eurozone fiscal crisis.

South Korea's government budget bounced back into surplus in 2010, and remained in the black in 2011, while the global financial crisis and its subsequent recession did not lead to any fiscalization onto the government's balance sheet through public- sector contingent liabilities, according to the statement.

Touching on external financing positions, Moody's said that " relatively low inflation, a low risk premium on government securities and a relatively strong outlook for economic growth mean that fundamental pressures on government debt capacity are remarkably absent."

The cost of insuring South Korea's sovereign debt against default has continued to fall on the back of improved overseas views over the country's economic fundamentals and external liquidity conditions. The credit default swap (CDS) premium on the country's five-year foreign currency bonds continued to drop to 125 basis points late last month after peaking at an all-time high of 699 bps on October 2008 when the country was hit hard by the global financial crisis.

Regarding the banking industry, Moody's said that macro- prudential measures served to reduce short-term foreign currency exposures and lessen the risks arising from relatively high loan- to-deposit ratios, stressing that the banking sector's vulnerabilities were effectively addressed.

Following the introduction of various macro-prudential rules such as bank levy on non-deposit liabilities and caps on banks' foreign currency forward positions, South Korean banks sought to replace short-term external debts with long-term ones, boosting their abilities to self-insure themselves from the potential external shocks.

In contrast, Moody's mentioned some risk factors facing South Korea such as rising household debts and public-sector debt.

Moody's noted that although the continued growth in non- financial public-sector debt has not yet imposed any direct burden on the central government's balance sheet, the impact of a possible extended period of deterioration in the sector warrants scrutiny, saying that if rising household debt is unchecked, this trend could impair bank asset quality and introduce a drag on private consumption.

The country's household credit, including loans from banks and non-bank financial institutions as well as credit purchases, reached 912.9 trillion won ($809.24 billion) as of the end of 2011, up around 700 trillion won from 12 years earlier. The annual growth rate of household debts came to 12.9 percent on average between 1999 and 2011, much higher than the nominal GDP growth of 7.1 percent over the cited period.