Korea has ability to combat crisis: Moody’s

Tom Byrne

Korea is well-positioned to weather the worsening global conditions thanks to its fiscal strength, the health of its banking system and manageable external positions, a senior official from Moody’s said.

However, the historically high level of household debt, which continues to pose a considerable threat to financial stability, may have compromised the country’s ability to absorb shocks.

With the eurozone debt crisis taking a turn for the worse, there has been apocalyptic talk among policymakers and analysts here about the fate of Korea’s export-reliant economy. Financial Services Commission (FSC) Chairman Kim Seok-dong went far as to say that the current situation could prove just as destructive as the Great Depression of 1929.

But talking to Korean journalists at a Seoul hotel Tuesday, Tom Byrne, the rating agency’s senior vice president and regional credit officer, stressed that Korea’s relatively light debt burden will allow a lot of wiggle-room for government authorities to stimulate the economy when they need to.

Korea’s growth continues to outpace other advanced companies while its debt to gross domestic product (GDP) ratio remains lower than most other major economies in the Asia-Pacific region, including Japan, India, Taiwan and Singapore.

One of the tools used by Moody’s to project the fiscal strength of countries for the foreseeable future is to measure the difference between the anticipated interest rates and nominal GDP growth figures, with negative differentials obviously linked to favorable predictions.

For the period between 2012 and 2017, Korea’s differential between projected interest rates and growth was measured at minus 2.8, lower than countries like the United States, Japan, Germany and Spain.

“Korea is not only much lower than other euro area countries in crisis, but also lower than countries in the Asia-Pacific region, and also one of the lowest globally. Our conclusion is that Korean authorities have a lot of fiscal space to stimulate the economy,’’ Byrne said.

However, family finances are an area where Korea finds itself weaker than it was in 2008, with credit extended to households reading 135.5 percent of disposable income and nearly 74 percent of GDP in 2011. The sliding property market, which has trapped millions of Koreans in negative equity, is also a concern.

Household’s high leverage continues to pose a key economic risk.

Moody’s, which upgraded Korea’s sovereign credit rating to A1 in 2010, said that geopolitical risks related to North Korea will not constrain the country’s rating. But it did say that Pyongyang’s new leadership transition has heightened uncertainties over regime behavior and longevity.

“Korea’s bond methodology indicative range is A1-Aa2, given moderate geopolitical risk,’’ according to the agency. <Korea Times/Kim Tong-hyung>

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