Bangkok--16 May--Asian Banker
Fitch Ratings has today affirmed the Republic of Korea's Long-term Foreign Currency Issuer Default Rating (IDR) at 'A+' and the Long-term Local Currency IDR at 'AA'. At the same time, the agency has also affirmed Korea's Short-term IDR at 'F1' and the Country Ceiling at 'AA'. The Outlook on the ratings is Stable.
The agency notes that Korea's sovereign credit fundamentals remain stable. "Security risks across the Korean peninsula have mildly eased following the resumption of the six-party talks and Pyongyang's commitment to the action plan for denuclearisation, according to the 13 February 2007 agreement, in exchange for heavy fuel oil," said Ai Ling Ngiam, Director, Asia Sovereigns. "However, technical complications related to the transfer of North Korean funds from Macau's Banco Delta Asia (BDA) has precluded a more timely implementation of the performance-based milestones towards dismantlement," Ms. Ngiam added. Fitch anticipates the ongoing progress within the auspices of the six-party talks will remain troubled, as North Korea continues to bide its time on clear steps towards dismantlement, possibly in exchange for further economic aid and concessions. An outright breach in the nuclear disarmament process by the North, which entails additional bilateral or multilateral economic sanctions, would put additional strains on an already fragile North Korean economy, especially in light of the deteriorating food shortage situation.
Korea's long-standing fiscal conservatism remains a fundamental rating strength of the sovereign compared to 'A' medians, as fiscal outlays seldom outpace increases in revenue. Fitch forecasts a consolidated central government surplus of 1.8% of GDP in 2007, which would be Korea's eighth successive fiscal surplus. Still, government debt is no longer a rating strength of the sovereign. Although the government maintains a primary fiscal surplus and manages a low interest burden, the general government (GG) debt levels registered 38% in 2006, higher than the 'A' median of 32%, while GG debt to revenue ratio of 152% last year also exceeds the 'A' median of 108%. Foreign currency smoothing operations to manage exchange rate appreciation have placed upward pressure on the GG debt levels due to the government's ongoing placements of treasury bonds to finance FX interventions. Fitch recognises, however, that increases in debt attributable to these activities are matched by an accumulation of official assets.
On the external finances front, the widening services sector deficit attributable to persistent travel and education outflows pose a major drag on the current account position. The authorities' efforts to stem these outflows via improving services standards may take some time to bear fruit, particularly since vested interest groups in the medical and education sectors limit market liberalisation. On the capital account front, large amounts of banks' short-term external borrowing have helped to offset portfolio equity outflows. The significant accumulation of short-term external debt has been mainly attributable to banks balancing their books while facilitating exporters' hedging activities, banks' arbitrage transactions and yen-denominated borrowing. "Still, Korea's foreign exchange reserves, liquidity ratio and net external creditor position puts it in good stead compared to 'A' medians," Ms. Ngiam noted. There appears to be minimal fundamental support in the balance of payments for KRW appreciation to continue, apart from self-fulfilling hedging and carry trade activities. Already, the basic balance, which is the sum of the current account balance and the net movement of long term capital (direct and portfolio investments) has been in negative territory since Q1 2006. Accordingly, Fitch anticipates the sharp spike in short-term external debt to gradually unwind.
--www.theasianbanker.com (May 16 2007)--