Fitch Maintains South Korea's Sovereign Credit Rating at 'AA-'... Economic Growth Forecasted at 2.6% and Inflation at 5% This Year

[Asia Economy Sejong=Reporter Kim Hyewon] The international credit rating agency Fitch has maintained South Korea's sovereign credit rating at 'AA-' with a stable outlook.

According to the Ministry of Economy and Finance on the 28th, Fitch stated, "Considering the recently announced fiscal soundness plans, South Korea's fiscal capacity is sufficient in the short term to manage the increase in national debt."

Fitch revised down its forecast for South Korea's national debt ratio to GDP from 58.6% to 51.5% by 2025, stating, "National debt is expected to increase more gradually than our previous forecasts." It added, "This will help mitigate the downside risk to the credit rating in the medium term." While Fitch had pointed out the rising national debt as a downside factor for the medium-term rating in its January announcement, it now mentioned that the downside risk will be "mitigated" due to the improved debt outlook.

Fitch said, "The new government's fiscal rules will help manage public sector debt risks going forward," but also assessed that the passage of these rules through the National Assembly remains uncertain. It also viewed the pressure to increase fiscal spending due to aging as a persistent challenge factor.

Fitch projected South Korea's economic growth rate to slow to 2.6% this year and 1.9% next year. Regarding inflation, it noted some easing since August and expects the easing trend to continue due to slowing commodity prices and monetary tightening. Fitch's inflation forecast for South Korea is 5.0% for this year and 1.5% for next year.

On external soundness, Fitch stated, "Despite recent trade deficits and declines in foreign exchange reserves, considering net external assets and the forecasted annual current account surplus, South Korea maintains sound external stability," adding, "Foreign exchange reserves relative to current payments remain at a higher level than AA-rated countries, indicating relative resilience."

Fitch also evaluated that while high household debt amid rising interest rates and slowing growth poses potential risks, it remains at a manageable level.

Considering all indicators, Fitch's rating model suggests South Korea's credit rating is at the AA level, but due to North Korea-related risks, it decided to maintain the AA- rating. Regarding inter-Korean relations, Fitch noted, "High levels of tension persist, diplomatic dialogue has been limited over the past few years, and further progress in the short term is unlikely."

The Ministry of Economy and Finance stated, "We have confirmed that Fitch's positive view is being maintained," and added, "We will actively respond to some concerns such as fiscal burdens from aging and household debt through meetings with rating agencies during the G20 Finance Ministers' meeting."