Reuters: US Dollar Report: Fitch: Korea Stimulus Delays Consolidation

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Fitch: Korea Stimulus Delays Consolidation Apr 16th 2013, 14:01 Tue Apr 16, 2013 10:01am EDT HONG KONG/LONDON, April 16 (Fitch) Korea's KRW17.3trn supplementary budget will delay further fiscal consolidation, but is consistent with the sovereign's 'AA-'/Stable rating, Fitch Ratings says. Sustained fiscal discipline in recent years has given Korea some headroom to accommodate fresh stimulus, but any inability to resume fiscal consolidation could limit the potential for upward ratings pressure. We think the supplementary budget illustrates policy flexibility in the face of an economic slowdown rather than a sudden break with the prudent policy stance that underpinned our upgrade of the sovereign last September. The supplementary budget, which totals KRW19.3trn (1.5% of GDP) if state funds are included, indicates that Korea's authorities also remain cautious regarding the global economic outlook and its possible implications for Korean growth. This concern was reflected in their recent decision to lower their real GDP growth forecast to 2.3% from 3.0% in 2013. It was also evident in the two stimulus packages presented last year, which totalled KRW14.4trn, or 1.2% of GDP. The Korean government announced the supplementary budget on Tuesday. It will mainly be funded by bond issuance. According to the government's own calculations (which exclude social security funds), it will increase the 2013 budget deficit to 1.8% of GDP from 0.3% in 2012 and debt to GDP by 1.9pp to 36.2% of GDP at end-2013. The main provisions of the stimulus component, such as job creation, SME support, and measures to boost the housing market, are consistent with pre- and post-election pro-growth policy statements by the government of Park Geun-hye, which won power in December. The administration recently unveiled a 140-point policy agenda that stressed "fiscal soundness" and said that "middle and long-term fiscal sustainability" would be a key component of the National Fiscal Management Plan for 2013-2017. A continued emphasis on fiscal prudence would support Korea's creditworthiness if it resulted in a resumption of the improvement in public debt dynamics after a delay caused by the supplementary budget. At 34.3% at end-2012, according to the government's figures, debt to GDP is already higher than the 'AA' median of 32.0%. Our September upgrade incorporated an assessment that geopolitical risks associated with North Korea cannot be entirely discounted, but are not inconsistent with an 'AA-' rating. The recent rise in tensions between the North and South does not materially affect this assessment. We continue to judge that the risk of a military conflict or a sudden collapse of the North (leading to reunification costs for the South) remains small, and therefore does not have implications for South Korea's current ratings. This judgement is partly informed by recent historical experience, such as in 2010, when tensions with North Korea had arguably increased even further, but hostilities did not ultimately reach the point where South Korea's creditworthiness was affected. Contact: Art Woo Director Sovereigns +852 2263 9925 Fitch Ratings (Hong Kong) Limited 28th Floor, Tower Two Lippo Centre Hong Kong Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Link this Share this Digg this Email Reprints

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