MOODY'S says slower growth has limited impact on Korea's Soverign credit profile

Moody's Investors Service says that against a backdrop of weak external demand, Korea's (Aa2 stable) export-dependent growth model has come under pressure. The consequently weakening operating environment underpins the negative outlook on the banking system. However, Moody's expects Korea's fiscal, institutional and external metrics to remain strong when compared to rating peers, which supports the stable outlook on the sovereign rating.

In a just-released report titled "Government of Korea: FAQ on Credit Impact of Growth Slowdown," Moody's answers several frequently asked questions by investors, including what impact slower growth has on the sovereign credit profile and why its outlook for the rating of the Government of Korea is stable, while its outlook for Korean banks is negative. The report notes that while lower growth poses negative pressures for banks, contingent liability risks from the banking system have already been incorporated into Moody's analysis of the sovereign's rating. Moreover, it expects continued structural reforms--including with respect to the public sector--to mitigate emerging sovereign credit risks.

At the same time, Moody's recognizes that high and growing household debt levels and a rapidly ageing population risk dampening domestic demand over the medium to long term. From a sovereign credit perspective, the transmission channel of slower growth onto the government's balance sheet is primarily through the need for more fiscal stimulus and support for policy banks. The Korean government's strong fiscal position creates space for such counter-cyclical policy measures.

In the near term, as weak external demand limits export growth, domestic consumption and investment will likely remain the main growth drivers, supported by the government's efforts to boost consumption and investment through tax breaks and deregulation, among other measures.

The report concludes that overall, the stable outlook on the sovereign rating reflects Moody's view that the country's credit strengths and challenges are balanced.

Nevertheless, faster implementation of structural reforms that boost real GDP growth on a more sustainable basis could put upward pressure on the rating. On the other hand, a backtracking of structural reforms and/or crystallization of contingent liabilities from government-related institutions or commercial banks on the government's balance sheet would lead to downward rating pressure.