Moody's: Korea's Aa3 rating supported by very high economic resilience and very strong government finances

Moody's Investors Service says Korea's Aa3 long-term government bond ratings with a positive outlook take into account the Korean economy's resilience to external shocks, as well as an expectation of sustained and robust long-term economic growth, despite near-term external headwinds. 

Furthermore, the country's track record of fiscal prudence has resulted in government debt ratios that compare favorably to peers, and Moody's expects strong political consensus for fiscal discipline to persist. 

Moody's conclusions were contained in its just-released credit analysis "Korea, Government of", which looks at the country's credit profile in terms of Economic Strength [assessed as "Very High (+)"]; Institutional Strength ["Very High (+)"]; Fiscal Strength ["Very High"]; and Susceptibility to Event Risk ["Moderate (-)"]. 

These represent the four main analytic factors in Moody's Sovereign Bond Ratings Methodology. The analysis constitutes an annual update to investors and is not a rating action. 

On April 10, Moody's affirmed Korea's Aa3 rating and changed the outlook to positive from stable, based on the government's improved management of state-owned enterprise debt, a lower vulnerability to global financial market shocks owing to macro prudential regulatory measures and improved risk management, and the country's track record of fiscal prudence. 

Moody's 'Very High (+)' assessment of Korea's economic strength is based on the economy's large size, diversity, and competitiveness, which will help the country to achieve robust medium-term growth, against the background of very high per capita incomes. 

The country's overall growth dynamics have proved relatively immune to external financial market fluctuations and turmoil, both during the global financial crisis and more recently, amid the emerging market sell-off that followed initial indications from the US Federal Reserve that it was moving towards policy normalization. Nonetheless, the report points out that Korea faces near term external headwinds from lackluster global demand and slower growth in China, an important trading partner. 

Moody's also notes that while concerns over rising household debt remain salient, the government is proceeding with measures to reduce related risks. 

The "Very High (+)" assessment of institutional strength reflects Korea's high degree of government effectiveness and policy credibility, marked by a bureaucratic system that is consistent in policy formulation and effective in its implementation. 

Moody's "Very High" assessment for fiscal strength stems from the country's strong fiscal fundamentals, as reflected in budget surpluses, a moderate government debt burden, among the lowest gross annual government financing needs of Moody's-rated sovereigns, and low shares of foreign-currency and external debt. 

The "Moderate" assessment for susceptibility to event risk is driven by the geopolitical risks associated with North Korea. 

Moody's notes a very limited susceptibility to event risks with regard to government liquidity and in the external sphere, and only low event risks emanating from the country's banking sector. 

In fact, Korea's vulnerability to external shocks has substantially receded since the 2008-09 global financial crisis.