This undated file photo shows a screen showing government bonds. (Image courtesy of Yonhap)
SEOUL, Jan. 3 (Korea Bizwire) — A credit rating agency has warned that South Korea could face downward pressure on its sovereign credit rating toward the end of the year due to the government’s decision to expand treasury bond issuance.
While global credit rating agencies have indicated that political uncertainties, including martial law and impeachment proceedings, would have minimal impact on South Korea’s sovereign rating, structural issues such as the country’s transition to long-term low growth and steadily rising government debt ratio could pose more significant concerns.
Lee Hyukjoon, head of the Financial SF Rating Division at NICE Investors Service, stated in a report released on January 2 that South Korea’s traditional economic stimulus approach may no longer be viable. “In the past, Korea successfully stimulated its economy during slowdowns by having one of the three major economic players – households, businesses, or the government – expand leverage. However, all three now carry high leverage, making it difficult to boost growth rates through additional borrowing,” Lee explained.
This marks the first public warning about sovereign creditworthiness from domestic or international rating agencies in recent times.
The government plans to issue 197.6 trillion won in treasury bonds this year, a 24.7% increase from last year’s 158.4 trillion won. The ratio of national debt to GDP is expected to rise further, particularly if supplementary spending is approved for economic stimulus.
Lee emphasized that credit rating agencies focus more on structural changes in debt repayment capacity rather than temporary events. “The deterioration of government debt service indicators due to the surge in treasury bond issuance could increase downward pressure on the sovereign credit rating,” he warned, adding that this could lead to downgrades for financial institutions, including banks, and higher overseas borrowing costs.
South Korea’s sovereign credit rating has remained unchanged since Moody’s upgraded it to ‘Aa2/Stable’ in 2015 and S&P to ‘AA/Stable’ in 2016. The national debt-to-GDP ratio has risen from approximately 34% in 2015-2016 to 47% following an increase in government spending during the COVID-19 pandemic under the Moon Jae-in administration.
Lee noted that while the Yoon Suk-yeol administration had resisted implementing supplementary budgets for three years, current pressures from lower-than-expected tax revenues and the need for economic stimulus may lead to fiscal expansion this year, potentially resulting in a steeper government debt ratio increase.
M. H. Lee (mhlee@koreabizwire.com)
