S&P "Korea's Growth Rate Forecasted at 3.6%... Base Interest Rate Likely Maintained Until 2022"

[Asia Economy Reporter Eunbyeol Kim] Global credit rating agency S&P forecasts South Korea's economic growth rate at 3.6% and expects the current policy interest rate to continue until 2022.

Sean Roach, S&P Asia-Pacific Chief Economist, stated at the online seminar "2021 Credit Risk Outlook: Balancing Economic Recovery and Debt Increase," jointly hosted by S&P and NICE Credit Rating on the 27th, "This year will be a favorable year for South Korea," maintaining the economic growth forecast of 3.6% for this year presented last year.

He explained, "South Korea responded well to the novel coronavirus disease (COVID-19) last year, and exports remained steady, but the employment recovery trend has slowed down in recent months." He expects vaccines to be supplied in the third quarter and advised, "It will be difficult for employment to fully recover before vaccine supply, and it is still too early to shift the policy stance to tightening; support to maintain employment should be sustained."

He also predicted that South Korea's exports will increase by 4.2% this year, and private consumption will grow by 4.5%.

Regarding the current base interest rate of 0.5%, he said, "Since the inflation rate is also 0.5%, the real interest rate is zero," adding, "In the past, the real interest rate has dropped to -1% or -2%, so the current 0% cannot be considered accommodative." He continued, "Even if vaccines are supplied, it will take time for employment recovery, wage increases, and inflation to occur, so economic support measures will still be necessary," and forecasted, "South Korea's policy interest rate will be maintained until 2022." However, he added, "If economic recovery exceeds expectations or if the U.S. Federal Reserve (Fed) adopts different policies in the future, South Korea's policy interest rate could also change."

Kim En Tan, Managing Director in charge of Asia-Pacific sovereign credit ratings, evaluated that "South Korea's national debt level is relatively low compared to other advanced countries," and the risk to the sovereign credit rating is not significant. Tan said, "Debt levels are low, growth is steady, and the external balance is solid," adding, "Unless performance in areas such as fiscal deficits is very poor, the possibility of a rating downgrade is low."

However, he pointed out, "Although the national debt level is low, contingent liabilities may arise, and the likelihood of their occurrence is higher compared to other countries."