by안근모 기자
2000.06.01 18:56:00
Ratings On Korea Affirmed : Outlook Remains Positive
Takahira Ogawa, Singapore (65) 239-6342 ; Chew Ping, Singapore (65) 239-6345; Graeme D Kowd, Tokyo (81) 3- 3593-8742
SINGAPORE (Standard & Poor"s CreditWire) June 1, 2000--Standard & Poors today affirmed its single-A long-term local currency sovereign credit rating and its triple-B long-term foreign currency sovereign and senior unsecured credit ratings on the Republic of Korea. Standard & Poors also affirmed the Republics A-1 short-term local currency and A-3 short-term foreign currency sovereign and senior unsecured ratings. The outlook on the long-term ratings remains positive.
Koreas ratings are supported by:
-- A much-improved external position. Central bank foreign exchange reserves, at about US$85 billion and rising, more than cover Koreas gross external financing gap. A more flexible exchange-rate policy since 1998 should preclude future liquidity crises. External debt net of liquid assets has improved and is now projected at 19% of exports for the end of 2000 from 81% at the end of 1997. The public sector will be a net external creditor in 2000.
-- A diverse economy with a flexible labor force. Koreas 2000 per capita GDP of US$8,750 is well above the US$3,750 median of the triple-B rated category. The countrys labor force also proved adaptable during the financial crisis by taking nominal wage cuts and lowering its participation rate with minimal labor strife. A broad-based export sectorexports grew 5% in 1999helped generate GDP growth of 11% in 1999 and will likely support the projected 7% growth in GDP for 2000.
-- A still manageable, albeit rising, government debt burden. Net general government debt of 28% of 2000 GDP affords the government flexibility in dealing with private sector restructuring, although interest to revenues has doubled in the past three years to over 9% currently.
Koreas ratings are still constrained by:
-- Incomplete private sector restructuring. Although the government has strengthened minority shareholder and creditor rights, improved accounting standards, and opened the economy to foreign investment, much is left to be done. Four of Koreas five largest chaebol industrial groups have ostensibly met the governments guidelines of reducing their debt-to-equity ratios to below 200% from, in some cases, over 500%. The average debt-to-equity ratio of the four chaebol stood at 174% at end-1999 compared with 352% a year earlier. The fifth group, Daewoo, collapsed in July 1999, prompting further government assistance to the financial sector, in this case, the rapidly growing investment trust company sector. With the smaller conglomerates, restructuring has come through debt rescheduling and debt-for-equity swaps, which may have only delayed the solving of asset quality problems in the financial system. Although regulations have improved, lending practices have less so, and much of the system remains in state hands, as the government has been unwilling to sell the banks at market clearing prices to strong foreign partners. As a result, Standard & Poors has raised its estimate of the fiscal cost of the financial sector bailout, excluding recoveries not yet recorded, to Korean won (W) 140 trillion from W120 trillion, or 29% of 1999 GDP.
-- An increasingly accommodative fiscal and monetary stance. Although the government outturn of a 4.6% general government deficit in 1999 was tighter than budgeted and should decline further to 3.5% in 2000, the projected primary fiscal deficit of 1.5% in 2000 is hard to justify given Koreas robust growth. Moreover, the deficits exclude a large part of the quasi-fiscal activity of bailing out the financial system, policy lending by development banks, and public enterprise investments for employment generation rather than investment returns. Fiscal analysis is further complicated by the opacity of Koreas local government, off-budget, public pension, and public enterprise accounts. The Bank of Korea is appropriately concerned that higher interest rates could further damage the still fragile state of the corporate sector. However, the current monetary policy, which includes the accumulation of reserves to prevent a further appreciation of the won, combined with an accommodative fiscal policy, could fuel inflation and again place the burden of adjustment on Koreas small depositors, who form much of the nations savings base.
-- Prospects of heavy costs for peninsular integration. Although improving relations with North Korea vindicate the Sunshine Policy of the Kim Dae-jung administration and reduce the risk of a tragic confrontation, they also increase the chance, albeit still remote, that the two countries will reunite. Given the disparity in income levels and development, such a reunification could cost South Korea and donor nations several times South Koreas annual GDP.
OUTLOOK: POSITIVE
Koreas impressive progress in recovering from its worst post-war recession could result in a ratings upgrade if the government demonstrates effectiveness in concluding its corporate restructuring by accelerating assets sales from asset disposal company, Korea Asset Management Corp. (KAMCO), and in tightening its macroeconomic policies. On the other hand, part of Koreas stunning post-recession recovery has been the result of a confluence of external factors, such as a favorable Japanese yen/won exchange rate, a strong U.S. economy, and favorable terms of trade. The current administration has yet to prove its ability to press ahead with corporate restructuring, now that it is operating from a weaker position following the April 13, 2000 National Assembly elections. Therefore, should the conjuncture turn less favorable while government policy hesitates to cool a potentially overheating economy, the ratings could stabilize at the current level.
ISSUER CREDIT RATING
Republic of Korea
Sovereign credit rtg Local currency A/Positive/A-1
Sovereign credit rtg Foreign currency BBB/Positive/A-3
AFFIRMED RATINGS
Republic of Korea
Snr unsecd debt issues Local currency A
Snr unsecd debt issues Foreign currency BBB