Despite rising household debt and weak profitability, South Korea’s growth rate is expected to remain strong enough this year, in line with its recently improved credit rating, Moody’s Investors Service said Tuesday.
“Korea’s economic growth rate is projected to hang in the 2.5-3.5 percent range, exceeding the government debt interest rate by the year 2020,” Tom Byrne, the company’s senior vice president, told reporters at a briefing.
Household debt, though weighing heavy on growth, will not visibly impact systemic stability, he said, citing the recent improvements in the country’s mortgage structure.
President Park Geun-hye’s “474” plan ― to boost the nation’s economic growth to 4 percent, increase the employment rate to 70 percent from the current 63 percent and reach per capita income of $40,000 ― will also help to maintain fiscal space, according to Byrne.
In April, the global credit rating company affirmed Korea’s Aa3 rating and changed the outlook to positive from stable. The key drivers for the upward action was the improved management of public corporation debts, reduced vulnerability to global market turbulence, and ongoing track record of fiscal prudence.
“The country demonstrated the ability to bounce back from external shocks and its relatively strong growth, despite lackluster global demand,” Moody’s said in its earlier report.
Its outlook for Korea’s banking system was once again stable, remaining unchanged since 2010.
“Our opinion is a combined result of a stable operating environment for banks and sustainable systemic support,” said Sophia Lee, vice president and senior analyst at the credit rating agency.
“But we note that banks’ asset quality faces tail risks from some of the sectors plagued by overcapacity.”
The high ratio of household debt to disposable income, which was 156 percent in 2014, will dampen domestic demand but will not pose a direct risk to banks’ asset quality, she added.
Moody’s also suggested a positive outlook for the nation’s key development banks, such as Korea Development Bank and Industrial Bank of Korea, citing the government’s strong support.
“The Korean government will use preemptive capital injections to resolve troubled banks, if necessary,” the analyst said.
By Bae Hyun-jung (tellme@heraldcorp.com)
