Bangkok--15 Oct--Standard & Poor's Standard & Poor's Ratings Services today said it had affirmed its 'A/A-1' foreign currency and 'A+/A-1' local currency sovereign credit ratings on the Republic of Korea (Korea). The outlook is stable. "Korea's credit profile includes two dynamic trends that balance each other out," Standard & Poor's credit analyst Takahira Ogawa said. On the one hand, the d?tente between South and North Korea and progress on the six-party talks lessen the risk of war and the risk of economic collapse in North Korea. Although Korea's financial assistance to North Korea is likely to be substantial over the coming decades, it would nevertheless be small compared to the cost associated with a potential war with or the sudden economic collapse of North Korea. Thus, the contingent fiscal risks emanating from this geopolitical issue have diminished. However, offsetting this positive trend, the external liabilities of Korea's financial sector have increased markedly to a projected $225 billion at year-end 2007, from $67 billion in 2002. If external liabilities continue to increase at this pace, the sovereign could be in a net external debtor position next year for the first time since the Asian financial crisis. During that crisis and on repeated occasions since, the government has intervened with public money to support its banks. "Given the high level of domestic credit to GDP (134% of 2007 GDP) and the financial sector's increased reliance on cross-border interbank funding, the contingent fiscal risks emanating from the financial sector have grown," said Mr. Ogawa. Korea's financial profile also includes some well-established trends. Korea has a flexible and resilient economy that has grown an average 5.7% a year since 1999. The government has maintained an average general government surplus of 1.3% of GDP, although these surpluses have not translated into a reduction of gross general government debt, which is projected to remain at 38% of GDP by the end of 2007, the same level as that in 2005. The outlook on the ratings on Korea is stable. "Upward pressure on the ratings could come from a renewed effort to make the labor market more flexible or the small business sector more competitive, or from further evidence that the d?tente with North Korea will lead to a lasting peace," said Mr. Ogawa. "Conversely, downward pressure could be placed on the ratings if the high contingent fiscal risks posed by the financial sector are realized, such that there is a need for government assistance." Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search. Media Contact: David Wargin, New York (212) 438-1579 [email protected] Analyst Contact: Takahira Ogawa, Singapore (65) 6239-6342