S&P raises S. Korea’s sovereign rating to AA-

September 15, 2015

S&P said Asia’s fourth-largest economy will likely maintain growth performance superior to most developed economies in the next three to five years.

SEOUL/SEJONG (Yonhap) — Global credit appraiser Standard & Poor’s (S&P) on Tuesday raised South Korea’s sovereign rating one notch from A+ to AA-, citing the country’s future growth potential and a decline in external debt.

S&P said Asia’s fourth-largest economy will likely maintain growth performance superior to most developed economies in the next three to five years. It also said risk of the country facing deterioration in external financing conditions have become more remote due to the decline in external debt owed by South Korean banks and the reduced weight of short-term borrowings compared to the total size of debt.

It said South Korea’s favorable policy environment, sound fiscal position and net external creditor status contributed to the change.

“Korea has exhibited stronger economic performance in recent years than other high-income economies,” it said. ” S&P estimates the trend rate of real per capita GDP growth at 3 percent and expect that average GDP per capita will rise above US$30,000 in 2018, from approximately US$27,000 in 2015.”

S&P then gave a long-term rating outlook of “stable” citing its expectations that the country’s credit metrics will remain broadly unchanged over the next two years.

AA- is the fourth-highest rating in S&P’s evaluation scheme and one notch below the AA status held by countries like France and Belgium. It is higher than the A+ rating that South Korea held from Sept. 2012 onwards.

The latest upgrade places South Korea on the same levels as China, Taiwan and Japan on S&P’s rating scheme, although Japan has a negative long-term outlook.

The finance ministry said the decision by S&P to mark up the country’s rating is noteworthy since a slowdown in the global economy has resulted in downgrades for other countries.

“South Korea is the only country that S&P has marked up to the AA- level since 2014,” it said, adding Seoul joined the ranks of the United States, Germany, Canada, Britain, France and Saudi Arabia in getting AA- equivalent or higher ratings from the world’s three top credit agencies that includes S&P, Moody’s Investor Service and Fitch Ratings.

The finance ministry said the rating upgrade can be seen as a sign of waning geopolitical risks facing Seoul, which will improve foreign investors’ perception of the country and reduce borrowing costs for local financial institutions and public corporations.

“S&P in the past placed great importance on risks associated with North Korea, but this may have been alleviated by the recent bilateral agreement to ease tensions along the demilitarized zone,” the ministry said.

The spread of state bonds may dip 10-20 basis points that can translate into some $40-80 million less being paid on interest, the ministry said, adding the S&P’s move will clearly differentiate South Korea from emerging markets and help stabilize the country’s credit default premiums.