Fitch Ratings raised its outlook South Korea’s sovereign credit rating to positive Monday, citing increased resilience in its external balances but cautioned the country faced hurdles to secure a credit rating upgrade.
“Sovereign creditworthiness is strengthening as the sovereign and external balance sheets grow more resilient,” Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch, said in a statement.
“However, a heavy external debt refinancing burden in 2012 and the volatile global economic and financial environment pose risks for the export-oriented economy. Successfully navigating these challenges over 2012 would support the case for an upgrade.”
Fitch lifted the outlook on Korea’s long-term foreign-currency issuer default rating of A-plus to positive from stable. It affirmed the country’s long-term local-currency rating at AA with a stable outlook.
Fitch said Korea’s rising foreign reserves and decreasing reliance on short-term external debt are strengthening its external liquidity.
What’s more, Fitch said Korea’s banking system’s reliance on short-term external debt has fallen since the global financial crisis relative to total bank liabilities, gross domestic product and foreign reserves.
Fitch noted Korea has buttressed its liquidity with an FX swap facility with the Bank of Japan, worth $70 billion, and pointed to Korea’s other bilateral swap arrangements, including a $56 billion facility in non-convertible yuan with the People’s Bank of China.
Fitch said it estimates Korea’s external maturities will pick up strongly in 2012 to about $66 billion, against an average $22 billion annually over 2007-2011, partly reflecting heavy borrowing by Korean banks and corporates before the global financial crisis. Foreign holdings of Korean sovereign debt, including Bank of Korea instruments, contribute $22 billion, Fitch said.
“Refinancing these maturities without putting pressure on the external finances and foreign reserves would strengthen the case for an upgrade,” Fitch said. -By Arran Scott