Fitch "Concerns Over Supplementary Budget Amid Impeachment Situation... Downside Risk to Medium-Long Term Credit Rating"

Global Top 3 Credit Rating Agency 'Fitch'

Interview with Director of Asia-Pacific Sovereign Ratings

"Korea's Political Uncertainty Hampers Negotiating Power with the U.S."

Jeremy Zook, Director of Asia-Pacific Sovereign Ratings at Global Credit Rating Agency Fitch/Photo=Fitch

A global credit rating agency has raised concerns that the emerging 'supplementary budget' proposal amid the impeachment situation could lead to an increase in national debt and deterioration of fiscal soundness. In a situation where welfare spending is bound to increase due to aging, if expansive fiscal operations continue, there is a forecast that the risk of credit rating downgrades could increase in the medium to long term.

Jeremy Zook, Director of Asia-Pacific Sovereign Ratings at Fitch, said in a written interview with Hankyung on the 12th, "If the political deadlock continues and the negative impact on the economy is greater than expected, there could be increased pressure to expand fiscal spending," and "This could be a factor that expands fiscal deficits and national debt." He expressed concern that the supplementary budget, gaining momentum in political circles, could harm fiscal soundness.

According to Fitch, Korea's national debt-to-GDP ratio was about 47% as of last year, similar to the median of AA-rated countries. Zook warned, "Although we expect the fiscal deficit to decrease following the recently passed (reduction) budget, the downside risk is tilted," and "If government debt continues to rise due to persistently high fiscal deficits, it could act as a downward pressure on credit ratings in the medium term."

Another threat to national fiscal soundness is aging. Zook pointed out, "Rapid aging will be another key challenge for Korea's economic and fiscal outlook," and "If pension and health-related spending increases in the long term, fiscal deficits could widen and debt could increase."

Like other global credit rating agencies such as S&P and Moody's, Fitch has maintained Korea's credit rating and growth forecast for this year even after last month's martial law situation. Korea's national credit rating assigned by Fitch is AA-, the fourth highest in Fitch's ratings. The outlook for the rating is also seen as 'stable.'

However, Zook noted, "We are forecasting Korea's economic growth rate at 2.0% this year, but considering recent economic indicators are weaker than expected, there is downside risk," and "High levels of political uncertainty and opaque policy outlook could negatively impact the economy by dampening investment and consumption." Nevertheless, he expects the negative impact of such political uncertainty on the overall Korean economy to be modest.

"Political Deadlock Makes It Difficult to Address Structural Issues"

Zook pointed out that recent political turmoil could undermine Korea's ability to respond to structural issues in society. He said, "Korea's economy is facing growing structural difficulties due to global trade protectionism, (industrial) competitiveness, and demographic (decline) issues," and "If political deadlock reduces the efficiency of policy decisions, it could become more difficult to address these issues." He further diagnosed, "We currently see Korea's potential growth rate at about 2.1%, but as the working-age population declines, the potential growth rate is likely to gradually decrease," and "The speed of growth rate decline will depend on investment, innovation, and economic reform efforts to improve productivity."

He also advised that there should be a prompt response to the inauguration of the second Trump administration, which advocates protectionism such as tariff increases. Zook pointed out, "There is considerable uncertainty regarding the possibility of tariff imposition, and it could simply be part of a negotiation strategy," and "In Korea's case, current political uncertainty could temporarily weaken negotiating power with the United States."

Zook predicted, "If Trump imposes a uniform 10% tariff on all countries, it could reduce American consumption, thereby burdening Korea's exports to the U.S.," and "Currently, the U.S. is Korea's largest trading partner, so such measures could negatively impact Korea's export performance."

However, he added, "While it is assumed that the U.S. will impose a 60% tariff on Chinese exports, China will implement strong policies in response to prevent a sharp slowdown in economic growth," and "China's policy response will have a positive effect in limiting the decline in Korea's exports."

Reporter Se-min Heo semin@hankyung.com