Jeremy Zook, director of Fitch Ratings’ Asia-Pacific sovereigns team, speaks in an interview with Yonhap News Agency in Seoul on Oct. 20, 2023 (Image courtesy of Yonhap)
SEOUL, Oct. 20 (Korea Bizwire) — The South Korean economy is forecast to be on a recovery track next year but the pace will be “very gradual” as China’s significant economic slowdown and a recession in the United States would hinder the growth of its exports, a senior Fitch Ratings analyst said Friday.
Jeremy Zook, director of Fitch’s Asia-Pacific sovereigns team, made the assessment in an interview with Yonhap News Agency in Seoul, as the global credit appraiser recently slashed this year’s growth projection for South Korea by 0.2 percentage point to 1.0 percent and revised down the 2024 outlook to 2.1 percent from 2.5 percent.
“The downward revision was really a reflection of the fact that we revised growth down significantly in China. South Korea is quite exposed in terms of exports to China and the economic slowdown in China will have an impact on Korea’s growth rate in the near term,” Zook said.
Fitch said the deepening property slump and government debts will weigh down the Chinese economy. It cut the 2023 GDP growth forecast for China to 4.8 percent from the previous 5.6 percent, and put the figure for next year at 4.6 percent.
The U.S. economy has been more resilient this year, but it is expected to slow “relatively sharply” to experience a recession in 2024, according to the analyst.
“We do think that exports (of South Korea) have sort of bottomed out at this point and will recover but will recover very gradually because of those economic headwinds from the rest of the world,” Zook said.
This AFP aerial photo taken on Oct. 31, 2021, shows the logo of China’s developer Country Garden Holdings on top of a building in Zhenjiang, China. (Image courtesy of Yonhap)
South Korea has an export-driven economy, and China is its No. 1 trading partner after the U.S.
Exports fell for the 12th month in a row in September, though last month logged the smallest on-year decline so far this year.
Fitch’s growth estimate for South Korea is bleaker than that made by the International Monetary Fund, which forecast a 1.4 percent growth for this year and 2.2 percent for 2024.
The analyst also cited the ongoing conflict between Israel and the Palestinian militant group Hamas as another challenge for South Korea, as the clash could affect inflation and the trade balance.
“The potential biggest risk for Korea is what might happen in terms of commodity prices in terms of oil and other energy commodities,” Zook said. “High oil prices would add pressure to its inflation and imports, as was the case during the Russia-Ukraine shock.”
The expert, however, noted that inflation “is under control” in South Korea and will fall to within the Bank of Korea’s target band by next year.
Inflation has generally been trending downwards, though consumer prices reported the highest on-year increase of 3.7 percent in five months last month.
The government set this year’s target at a 3.3 percent increase, with the figure during the first nine months of 2023 coming to 3.7 percent.
Taking a longer-term perspective, Zook cited an aging population as the biggest challenge for the South Korean economy and its sovereign rating.
An official checks 50,000-won notes to see whether there are any counterfeits at the headquarters of Hana Bank in Seoul in this file photo taken Sept. 25, 2023. (Image courtesy of Yonhap)
“Lower working age population will lead to lower potential GDP growth and higher fiscal burden for the government. You will have higher health costs and potentially less buoyant revenue streams,” Zook said.
Fitch expected the South Korean government’s debt-to-GDP ratio to continue to rise over the next several years, which is one of the major factors that prevent any potential upgrade in its sovereign rating.
“But the government does seem focused on trying to rein in the deficit in the near term and keep the debt ratio relatively low so that Korea can help manage some of those longer-run fiscal risks that come with the aging population,” Zook said.
Earlier this week, Fitch reaffirmed South Korea’s sovereign rating at “AA-” with a stable outlook.
The agency has maintained the level of AA- for South Korea, the fourth-highest level on its sovereign ratings table, since September 2012 when it upgraded the rating by one notch from A+.
(Yonhap)
