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Investing.com -- Fitch Ratings has confirmed Korea’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ’AA-’ with a Stable Outlook, despite rising political instability and a slowdown in economic growth.
The rating reflects Korea’s strong external finances, steady economic performance, and a vibrant export sector. However, the country faces geopolitical risks related to North Korea and structural challenges due to an ageing population. The recent increase in political uncertainty, sparked by President Yoon Suk Yeol’s brief martial law declaration in early December, is expected to continue in the coming months. While this situation doesn’t seem to significantly impact Korea’s institutions, governance, or economy, it could become a risk if the crisis continues for a prolonged period.
The GDP growth forecast for 2025 has been revised down to 1.7% from 2.0% as political uncertainty has impacted confidence, and recent data has been subdued. Exports are expected to moderate due to a predicted 10% global tariff by the new US administration. However, activity should gradually increase over 2025 as the government increases budget spending, confidence recovers, and the Bank of Korea (BOK) eases monetary policy.
In 2026, GDP growth is expected to be 2.1%, as consumption and prospects for facilities and construction investment improve. However, structural headwinds from demographics and rising global competition are building.
The consolidated fiscal deficit is forecasted to fall to 1.0% of GDP in 2025, from a Fitch-estimated 1.7% in 2024, as revenue recovers and expenditure restraint continues. Government debt is expected to increase in 2025 to 48.4% of GDP from an estimated 47.3% in 2024, just below the 49.0% ’AA’ peer median.
Despite high relative household debt, it has steadily declined from just under 100% of GDP in 2022 to just above 90% in 3Q24. Financial stability risks are viewed as manageable despite prolonged high interest rates, with banks’ asset quality generally remaining sound.
Korea’s robust external finances are supported by persistent current account surpluses that support a large net external creditor position of 23% of GDP. The current account surplus is forecasted to remain high at 4.5% of GDP in 2025, down slightly from 5.0% in 2024.
Tensions with North Korea are elevated and navigating the relationship is becoming increasingly complex. Despite this, Korea’s ESG Relevance Score (RS) of ’5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, reflects its record of peaceful political transitions, strong institutional capacity, and effective rule of law.
The Country Ceiling for Korea is ’AA+’, two notches above the LT FC IDR. This reflects strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
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