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SEOUL, Jan. 27 (Yonhap) — Global credit appraiser Fitch Ratings said Thursday it has reaffirmed South Korea’s sovereign rating at “AA-” with a “stable” outlook.
Fitch’s rating for South Korea has been AA-, the fourth-highest level on the agency’s table, since September 2012. A stable outlook means there is a high possibility that it will maintain the current rating in the coming months.
Fitch said Korea’s robust external finances, resilient macroeconomic performance and strong exports are balanced against geopolitical risks from North Korea and structural challenges from an aging population.
It said the country has fiscal room to accommodate its rising government debt-to-GDP ratio in the near term, but a sustained rise in the debt ratio could put medium-term rating pressure.
“Korea’s shift towards more active fiscal spending and tolerance of fiscal deficits appears to be becoming more entrenched. This could add pressure to the rating over the medium term,” Fitch said in a release.
Fitch maintained its 2022 growth outlook for South Korea at 3 percent, saying that the recovery of private spending will likely support the economic growth.
The agency’s growth outlook is on par with the estimates by the Bank of Korea (BOK) and the International Monetary Fund (IMF).
Asia’s fourth-largest economy grew 4 percent last year, the fastest growth in 11 years, on the back of robust exports.
“Consumption will be the key growth driver as domestic activity continues to recover towards pre-COVID-19 pandemic levels during the year,” Fitch said.
Exports are likely to remain “resilient” on the back of robust demand for chips, but the growth pace of exports will decelerate due mainly to China’s economic slowdown, it said.
Fitch forecast the BOK will raise the policy rate two more times this year to tame inflation but expected no further hikes in 2023.
On Jan. 14, the BOK raised the benchmark interest rate by a quarter percentage point to 1.25 percent, marking the third pandemic-era hike since August and November last year.
“We expect these price pressures to be transitory, with inflation averaging 2.6 percent in 2022 and declining to 1.6 percent in 2023,” it said.
The agency’s 2022 inflation outlook is higher than the BOK’s forecast of 2 percent. The Korean government expects consumer prices to grow 2.2 percent this year.
Fitch forecast the country’s fiscal deficit to narrow this year compared with last year, but voiced concerns about risks from growing national debt.
South Korea’s consolidated fiscal deficit, a gauge of fiscal health, is forecast to be equivalent to 3.1 percent of GDP this year, lower than Fitch’s estimate of 4.1 percent in 2021. The country’s debt-to-GDP ratio will likely reach 49.9 percent by end of this year.
It said the March presidential election adds uncertainty to the country’s medium-term fiscal outlook as the two leading presidential candidates advocate for sustained fiscal support.