September 14, 2012

South Korea Sees Third Rating Upgrade

S&P cites lower regional risk after North Korean leadership change

South Korea was given its third debt rating upgrade in less than three weeks as Standard & Poor’s raised it one step to A+, citing a lower risk on the Korean peninsula after a “smooth” change in leadership in North Korea.

Bloomberg reported Friday that South Korea’s new rating is the fifth highest S&P gives, only a single notch below those of China, Japan, Saudi Arabia and Taiwan. Fitch Ratings has put South Korea at AA-, the agency’s fourth highest rating, and Moody’s Investors Service has graded it at Aa3, also its fourth highest.

After the upgrade the won rose, hitting its strongest level since March 2 both on that news and word from the U.S. Federal reserve on a third round of quantitative easing. On Thursday the Bank of Korea had announced that it was leaving interest rates unchanged, but the rise in the country’s currency may push it to act.

“This is positive for Korean government bonds and suggests more capital inflow into Korea,” said Kwon Young Sun, a Hong Kong-based economist at Nomura International, in the report, adding, “Combined with quantitative easing in the U.S., this will likely add appreciation pressure on the Korean won. The Bank of Korea will cut rates in October.”

The central bank had opted to leave rates where they are, at 3%, in case the global economy slows further; then it will have room to move. As an alternative to cutting rates, it announced instead that it would add another 1.5 trillion won ($1.345 million) to its loan program for small businesses that want to refinance at a lower rate.

Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul, was quoted saying, “Korea is apparently doing well on fiscal soundness and economic resilience, when many others are suffering rating cuts. The rating upgrade should increase foreign investors’ appetite for Korean assets.”

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