South Korea’s credit rating stable despite geo-political risks from North Korea

Rating agency Fitch has affirmed the rating of South Korea and kept the outlook stable, while many have been expecting credit downgrade amid geo-political risks arising from North Korea, economic weakness, thanks to China.

Instead Fitch has praised South Korea's economy by saying -

• Korea's macro-economic performance is strong. It expects GDP to accelerate to 2.7% in 2016 and 3% in 2017. It however warns of fast population ageing and low productivity growth.
• According to the agency, strong macro-economic environment compensates for the geo-political risks arising from North Korea's volatile regime.
• South's net external asset position and reserve have good provision for additional risks.

Nevertheless China's economic weakness do taking its toll on the economy. Exports have dropped to lowest since the crisis. Trade balance has seen significant reduction. Last was $5.3 billion.

We expect Bank of Korea (BOK) to accommodate policy further by 50 basis points in 2016.

Inflation might be proving just the room it needs. According to latest report released today, core inflation dropped to lowest level in 12 months. In January core inflation dropped to 1.7% from 2.4% in December. Headline saw similar drop to 0.8% from 1.3% in December.

We expect Korean Won to decline further, which is currently trading at 1207 per Dollar.