South Korea’s sovereign creditworthiness is improving

In mid-September, Standard & Poor's upgraded the country's credit rating by one notch to "AA-" on the back of a sound economic growth outlook as well as a decline in the banking sector's external debt and a lower share of short-term borrowing. Moody's holds a "positive" outlook on South Korea's "Aa3" rating, while Fitch rates the country in the "AA-" category with a "stable" outlook. 

Inflation remains low, hovering at ¾% y/y since June and is well below the Bank of Korea's target corridor of 2½-3½%. Due to negative producer price inflation (-4.4% y/y in August) and low international oil prices, inflation will likely remain below the central bank's target range over the coming quarters. Price gains are expected to start picking up gradually in the final months of 2015 on the back of positive base effect from the oil price collapse, approaching the 1½% y/y mark by the end of the year. The South Korean export-oriented economy is feeling the impact of subdued global demand. 

"We have made a modest adjustment to our real GDP growth projections and now estimate that the country's output will expand by 2.5% this year (compared with the earlier forecast of 2.7%)", says Scotiabank.

As policymakers' fiscal and monetary stimulus filter through to the real economy and business and consumer sentiment continue to recuperate, South Korea's economic expansion will likely reach 3.3% y/y (compared with the earlier forecast 3.4%) in 2016.