Bank of Japan poses greater risk to Korea’s profile than Pyongyang – Asia Q1 results


Matthew Turner
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Analysts have downplayed the impact of geopolitical sensitivities emanating from Pyongyang on South Korea’s credit outlook. However, South Korea’s political score fell marginally in a quarter that saw tensions rise between the two peninsula states. As a result, the sovereign fell two places in the rankings in Q1.

Moody’s noted in a recent report: “Pyongyang’s bellicose rhetoric highlights geopolitical risks, but does not undermine South Korea’s credit fundamentals.”

However, the implications of Japan’s aggressive monetary-easing measures, as well as the loose monetary policy exercised by other central banks in the region, coupled with dwindling global growth and geopolitical disputes, is weighing negatively on Korea’s risk outlook, according to economists.

The challenges facing Korean policymakers is reflected in ECR data, which show that Korea’s policy environment worsened by 0.2 points to 6.4 points in Q1 2013, as the new government grapples to take control of Korea’s position in the rapidly changing political and economic landscape.

Ronald Man, economist at HSBC, recognizes that monetary policy will be a key issue in the next quarter. “Aggressive easing by the Bank of Japan affected Korean exports and Korea’s growth outlook negatively,” he says.

“The recent weakening of the yen against the won hasn’t quite shown up in the [Korean] export figures so far and that’s because the currency effects take time to channel into real economic activity.

“But nonetheless, the yen-won cross has been quite volatile lately and if the won is sustained at a high pace against the yen it will pose downside risks to our growth forecasts.”

The won’s increased volatility and monetary-policy challenges were made apparent by participating economists in ECR’s Q1 survey, as Korea’s monetary policy and currency stability indicator deteriorated by 0.1 points to 6.2 points in Q1 2013.


Meanwhile, a report by Capital Economics recognizes weaker export growth and slower global demand will have a negative impact on Korea’s economic outlook in Q1-2013.

However, Man points to some positive changes on the fiscal side, which should help off-set the risks emanating from a China slowdown. “Korea’s debt-to-GDP level is among the lowest of OECD countries,” he says.

“The supplementary budget, announced yesterday, will not damage the country’s track record of fiscal prudence, as government spending is targeted at job creation. This will help cushion the blow from weaker-than-expected growth in China.”

Indeed, Korea’s government finances and employment sub-factor scores remain the country’s strongest economic metrics, according to the ECR analyst. Korea’s government finances score of 6.5 points is marginally more than the Asian average of 6.4 points, while the country’s employment indicator (7.1) enjoys a 0.2 point advantage over the East Asian average.


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