Fitch Ratings Warns South Korea's Public Finances No Longer a Credit Rating Strength

Fitch warns South Korea's public finances no longer a credit rating strength due to rising debt and spending, posing risks to economic stability and growth.

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Fitch Ratings Warns South Korea's Public Finances No Longer a Credit Rating Strength

Fitch Ratings Warns South Korea's Public Finances No Longer a Credit Rating Strength

Fitch Ratings has cautioned that South Korea's public finances are no longer a credit rating strength due to rising government debt and spending. The rating agency expressed concerns over the country's growing fiscal deficit and rising debt levels, which it says have become a neutral factor in its credit assessment rather than a positive one.

Jeremy Zook, Fitch's Asia-Pacific director, noted that South Korea's debt ratio has risen to 51.4% of GDP in 2024, higher than the 'AA' median of 48.5%, and is projected to reach 53.6% by 2028. "This deterioration in public finance metrics is relative to South Korea's peers, as the country's debt ratio was much lower than the 'AA' median before the pandemic," Zook said. "While this is not a weakness for South Korea's credit profile, it is no longer a rating strength and has become a neutral factor."

The caution comes as the South Korean government has been increasing spending to support the economy and address social issues, leading to a widening fiscal deficit and rising debt levels. The pandemic-era stimulus policies have pushed up South Korea's debt ratio sharply from 35.9% in 2018 to 50.4% by 2023.

Why this matters: South Korea's deteriorating public finances could have implications for its credit rating and borrowing costs. The country's ability to manage its debt and maintain fiscal sustainability will be crucial for its economic stability and growth prospects.

Fitch believes maintaining a lower debt ratio in the near term is important for South Korea to manage its longer-term risks, such as an aging population. The new conservative Yoon Suk Yeol administration has prioritized fiscal sustainability, but the recent landslide victory of the liberal opposition party in the parliamentary election may lead to a more gradual fiscal consolidation.

The opposition Democratic Party is urging the government to draft a supplementary budget for a universal cash handout scheme, which Zook said could risk keeping inflation more persistent and impact the Bank of Korea's monetary policy. Despite the economic growth in the first quarter, Zook said the strong GDP data could push back interest rate cuts "just slightly" while retaining the projection of two 25-basis-point cuts in the latter half of the year.

Fitch anticipates South Korea's economy to grow 2.1% in 2024 after a 1.4% expansion in 2023, with some upside potential after the strong first-quarter GDP data. However, the agency stressed that South Korea's rising debt levels and the government's ability to consolidate its finances will be key factors in determining the country's credit rating going forward.

Key Takeaways

  • Fitch warns South Korea's public finances no longer a credit rating strength
  • Debt ratio to rise to 53.6% by 2028, exceeding 'AA' median of 48.5%
  • Pandemic-era stimulus policies pushed up debt ratio from 35.9% in 2018
  • Deteriorating public finances could impact credit rating and borrowing costs
  • Fiscal consolidation crucial for managing long-term risks like aging population