Bangkok--5 Sep--Standard & Poor's Standard & Poor's Ratings Services today assigned its 'A' long-term foreign currency senior unsecured debt rating to the Republic of Korea's (Korea; foreign currency A/Stable/A-1; local currency A+/Stable/A-1) proposed benchmark size U.S. dollar global bonds. "The rating reflects Korea's dynamic and resilient economy and reasonably solid fiscal position, which are balanced against its high contingent risks and the delays in implementation of structural reforms--including labor market and SME (small and midsize enterprise) sector reform," said Standard & Poor's credit analyst Takahira Ogawa. Since 2000, Korea has maintained a general government surplus, which averaged 1% of GDP (including social security and excluding lending to the financial sector). Gross general government debt is projected at 35.6% of GDP by the end of 2008, including guaranteed debts, which is the lowest since 2005. Nevertheless, this level of government debt is higher than the 14.8% registered in 1997, due mainly to the heavy cost of restructuring the financial sector, which amounted to more than one-third of 1998 GDP. Korea's net general government debt compares very favorably to the 'A' median (14.1% of GDP). Although it was not a comprehensive restructuring of the pension system, the government in August 2007 successfully extended the life of the national pension fund reserves by 13 years; it is now estimated that the reserves can last until 2060. Korea's external position, which has been one of the supporting factors for the sovereign credit rating in recent years, is showing some erosion. Korea has been a net external creditor in terms of net assets/debts (not assets/liabilities, which has been in net liabilities) in past eight years. However, as Korea's external debts are increasing faster than external assets, the country is expected to be a net external debtor within this year. A part of that increase was borrowings by foreign banks' Korean branches, which account for more than half of the cross-border interbank funding and 16% of total debt. That is significantly higher than the 4% in 1997. As such, the risk associated with the recent increase of Korea's short-term external debts is actually limited by a growing portion of such cross-border interbank funding by foreign banks' branches in Korea. During the Asian financial crisis and on repeated occasions since, the government has intervened with public money to support its banks. Given the high level of domestic credit as a percentage of 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. Foreign currency reserves totaled US$243 billion at the end of August 2008. This would be able to cover 102% of projected short-term external debt and debts maturing within one year in 2008, but is considerably lower than the peak of 247% in 2003. Labor market reforms and improvements in the competitiveness of the SME sector have been slow. As the country's population is ageing rapidly and major Korean companies have started investing heavily abroad, the flexibility of Korea's labor resources and strength of its SMEs are key to maintaining its medium- and long-term growth prospects. The significant geopolitical risk posed by North Korea is the largest negative factor for the sovereign credit rating of Korea. Although North Korea has acted provocatively by conducting a nuclear test and missile launches, Standard & Poor's base-case scenario is for a peaceful status quo to hold. The six-party talks will probably be a protracted and inconclusive process, rendering substantial progress on the nuclear disarmament of North Korea remote. The stable outlook reflects the balance of factors affecting the sovereign rating. Downward pressure stems from the potential contingent costs of reunification and military risk from North Korea, which is offset by the resilient fiscal position and the country's dynamic economy. "In the unlikely event of a military conflict, the ratings on Korea would most likely fall by several notches," Mr. Ogawa said. "Another scenario with slightly higher probability, albeit still low, is the collapse of the North Korean economy. The consequent fiscal burden of reunification would result in the ratings on Korea falling, but to a lesser extent, depending on events surrounding the collapse," Mr. Ogawa added. Conversely, further progress in structural reform in the financial and corporate sectors, an easing of geopolitical tension due to a multilateral settlement with North Korea, or a reduction in the Korean government's debt burden in anticipation of future reunification costs could lead to an upgrade, he said. A Korean-language version of this media release is available via standardandpoors.co.kr or via Standard & Poor's CreditWire Korea on Bloomberg Professional at SPCK. 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; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Media Contact: David Wargin, New York (1) 212-438-1579, [email protected] Analyst Contacts: Takahira Ogawa, Singapore (65) 6239-6342 KimEng Tan, Singapore (65) 6239-6350