Moody's maintains S. Korea's credit rating at Aa2 with "stable outlook"

Posted on : 2021-05-13 17:35 KST Modified on : 2021-05-13 17:35 KST
The credit rating service bumped up its projection of S. Korea's economic growth rate this year to 3.5%
Christian de Guzman, senior vice president at Moody's (provided by Moody's)
Christian de Guzman, senior vice president at Moody's (provided by Moody's)

The international credit rating service Moody's kept South Korea's national credit rating at "Aa2," while adjusting its projection of this year's economic growth rate up to 3.5%.

But as the national debt continues to grow in the future, the South Korean government's previously strong management of macroeconomic policy will be put to the test, it predicted.

Moody's announced Wednesday that it was keeping South Korea's credit rating at the level of "Aa2" with a stable outlook, adding that it had adjusted this year's growth rate up by 0.4 percentage points from its previous projection of 3.1% last February.

The scores reflect South Korea's strong fundamentals and ability to recover from the shockwaves of the COVID-19 pandemic. At the same time, Moody's also pointed to potential challenges such as rising government debt, the ongoing stresses posed by an aging population, and the risk of a clash with North Korea.

Moody's Senior Vice President Christian de Guzman said, "Korea's GDP contracted 1 percent in 2020, outperforming most of its similarly rated, advanced economy peers."

Based on steady demand for exports in electronics and other manufacturing and the administration's loose approach to fiscal policy, de Guzman predicted a growth rate of 3.5% for 2021.

Moody's also predicted that South Korea's national debt would continue to rise due to the lack of parallel adjustments to increase tax revenues while implementing expansionary fiscal policies.

According to this analysis, the rate of increase in government expenditures is outstripping the rate of tax revenues, amid an absence of measures to increase revenues at a time when government spending has continued to grow with the pursuit of a "Korean New Deal" involving job creation, social safety net expansions and support for SMEs.

On that basis, Moody's predicted that by 2025, the government's fiscal role of keeping the national debt ratio below 60% of GDP and the consolidated fiscal balance within -3% would be put to the test.

In particular, with social expenditures poised to continue rising amid the aging population trend, it projected that public debt would increase even more over the next 20 years without measures to increase tax revenues.

In the short term, the weakening of fiscal soundness would not be large in comparison with other countries with a similar credit rating, de Guzman said. At the same time, he predicted that government debt would reach "historically" high levels.

Since assigning South Korea its third-highest credit rating in December 2015, Moody's has kept it there for over five years. It is the second-highest rating for an Asian country, after Singapore (Aaa). Both Japan and China are two rungs lower at "A1."

By Lee Jeong-hun, staff reporter

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