Pitch's Warning... "South Korea's Potential Growth Rate Downgrade"

Aging Population and Rising National Debt Increase Risks
Credit Rating Maintained at AA- with Stable Outlook
IMF: "Pandemic Over, Next Year Remains Challenging"

[Asia Economy New York=Correspondents Baek Jong-min, Jang Se-hee, Lee Chun-hee] The international credit rating agency Fitch has downgraded South Korea's potential growth rate from 2.5% to 2.3%. While maintaining South Korea's sovereign credit rating at AA- (stable), Fitch viewed the decline in the working-age population due to low birth rates and aging as a constraint on medium- to long-term growth. It also warned that the increase in national debt is becoming a risk factor in fiscal management.

On the 22nd, Fitch announced South Korea's credit rating and explained the reason for the downward revision of the potential growth rate, stating, "The country is facing medium-term growth pressures due to rapid population aging." It added, "The current government has announced a Korean-style New Deal involving large-scale fiscal spending to offset medium-term concerns, but it is still too early to evaluate."

The potential growth rate refers to the forecasted economic growth rate that can be achieved at maximum without causing inflation. A decline in the growth rate can be interpreted as a decrease in growth potential.

Fitch cited aging and the increase in national debt as risk factors for the Korean economy. In particular, it analyzed that the increase in national debt due to rising expenditures is a risk factor for fiscal management. The general government's fiscal deficit (central government, local governments, and non-profit public institutions) is expected to expand from 3.7% of GDP last year to 4.4% this year but will still remain below the AA median of 5.3%.

Therefore, Fitch predicted that the second supplementary budget bill currently being discussed in the National Assembly will improve medium- to short-term fiscal indicators compared to previous forecasts, assuming that no additional deficit bonds are issued and some government bonds are repaid. Fitch revised South Korea's national debt-to-GDP ratio forecast from 47.8% to 47.1% for this year and from 58% to 54% for 2024.

Fitch also forecasted that the Bank of Korea will raise the base interest rate by 25 basis points (bp = 0.01 percentage points) once this year and twice next year.

Fitch projected South Korea's growth rate at 4.5% this year, stating, "Growth is expected to continue for the time being due to strong exports and investment," and added, "Although social distancing measures were strengthened due to an increase in COVID-19 cases, consumption recovery is expected to continue in the second half of the year, supported by accelerated vaccine distribution and the second supplementary budget."

However, concerns remain that the economic recovery may slow due to the recent fourth wave of COVID-19. On the day, the number of new domestic COVID-19 cases reached 1,842, setting a new record again. This is an increase of 58 cases from the previous day (1,784), marking the first time the daily cases exceeded 1,800.

Meanwhile, the International Monetary Fund (IMF) maintained its global economic growth forecast at 6% for this year and predicted that the end of COVID-19 will still be difficult next year. IMF Managing Director Kristalina Georgieva stated on the 21st, "Some countries are expected to grow faster, while others will grow more slowly," indicating that the pace of recovery will vary by country.