On Sept. 14, 2012, Standard and Poor’s Rating Services upgraded Korea’s sovereign credit rating from ‘A’ to ‘A+’. The outlook is ‘stable.’ S&P had upgraded Korea’s credit rating from ‘A-’ to ‘A’ in May 2007, where it had remained until today’s upgrade. With S&P’s credit rating upgrade, Korea has seen its sovereign credit rating upgraded by all 3 major credit rating agencies (Fitch, Moody’s and S&P) in the same year.  With today’s upgrade Korea has received the highest comprehensive credit rating across the 3 rating agencies in 15 years. 

Standard and Poor’s noted a reduction in geopolitical risk from North Korea and Korea’s “favorable policy environment, sound fiscal position, and broadly balanced external liability position” as reasons for the upgrade. 

Relatively weak economic indicators in the next couple of years resulting from the global economic slowdown has led to forecasts of 2.8% growth in 2012-2013, a below the 3.5% average over the last 5 years. However, Standard and Poor’s assessed Korea’s policy making environment as effective, stable and predictable, which has helped to promote economic development and stabilize the economy during this period of global economic stress.

Korea maintains a healthy fiscal position, reporting general government surpluses in most years since 2000. Korea’s net general government debt, projected at 21% GDP in 2012 is also considered modest, according to the S&P press release.

Finally, Standard and Poor’s noted Korea’s low level of external liabilities, projected at just 10% of current account receipts in 2012, and consistent current account surpluses give Korea more policy flexibility.

This credit rating upgrade carries with it considerable meaning as S&P is the most conservative of the credit ratings agencies. It can be interpreted that, more than anything, S&P had been greatly concerned about the risk related to North Korea and that those concerns, to some extent, have been eased.

This year’s credit rating upgrades is expected to have a positive effect on the Korean economy in a number of ways. Sovereign credit rating upgrades have a positive influence on domestic financial institutions and corporations. It should also have an immediate and considerable impact on public corporations and government-run financial institutions. Also, the sovereign credit rating upgrade shows that in the mid- to long-term, it is possible for domestic institutions to have their credit rating upgraded, as well. Standard and Poor’s, in the same press release, also upgraded the credit ratings of the Export-Import Bank of Korea, Small Business Corp., Korea Housing Finance Corp., and Korea Finance Corp. 

Domestic financial institutions and corporations are expected to see a fall in foreign financing costs due to a fall in interest rate spreads. In real terms, the interest rate on foreign debt issued has fallen following the Moody’s (Aug. 27) and Fitch (Sept. 6) credit rating upgrades. Specifically, Korea’s CDS has had a huge drop relative to other major Asian countries (Aug. 24: 107bp -> Sept. 13: 74bps)