Foreign And Local Long-Term Sovereign Ratings On Republic of Korea Affirmed; Outlook Stable

The credit ratings on Korea are supported by the nation's dynamic economy, sound fiscal position, and a projected modest net external debtor position.

--We affirmed our sovereign ratings on the Republic of Korea.
--The outlook on the long-term credit rating remains stable.

Standard & Poor's Ratings Services today affirmed its 'A/A-1' foreign-currency and 'A+/A-1' local-currency sovereign credit ratings on the Republic of Korea. The outlook remains stable. The transfer and convertibility (T&C) assessment on Korea remains 'AA-'.

The sovereign credit ratings on Korea are supported by the nation's dynamic economy, sound fiscal position, and a sizeable holding of foreign exchange reserves. These strengths balance weaknesses arising from large contingent liabilities and reduced monetary flexibility associated with banks' significant short-term external borrowing.

We forecast Korea to register average per capita real GDP of 2.2% in 2009-2011, compared to 0.7% for the median 'A' sovereign in the period. We also project that the general government account will show a deficit averaging 0.8% of GDP to bring net debt to below 10% of GDP at the end of 2011. These metrics are expected to be healthier compared with our expectations for the median 'A' sovereign. Moreover, we expect monetary authorities' foreign exchange reserves to rise to close to US$300 billion at the end of 2010. Together with external lending by other resident entities, Korea's net external debt is forecast to amount to about 1% of current account receipts in 2010.

Contingent liabilities faced by Korea remain the chief weakness in its credit fundamentals. Apart from the significant potential burden of a banking system distress scenario, Korea also faces the significant but uncertain costs of reunification if the North Korean regime fails. Another credit weakness of Korea is the banking sector's significant short-term external borrowing. This could cause significant disruptions to the country's financial system if international financial market conditions worsen abruptly.
The T&C assessment on Korea remains 'AA-'.

The stable outlook on the ratings on Korea reflects our expectations that the general government account will return to a sustainable balance within the next two years. This will allow further reduction of its relative net government debt to balance its sizeable contingent liabilities. Standard & Poor's may revise the ratings upward if fiscal improvements are substantially better than our current projections and future developments lead to significantly smaller estimates of contingent liabilities for the government. Conversely, we may lower the ratings if we believe that the fiscal deterioration will be much more severe and prolonged than our current expectations. This could result from negative fiscal pressures arising from a renewed global slowdown.
Related Research
"Sovereign Credit Ratings: A Primer," published May 29, 2008, on RatingsDirect.

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