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Korea deserves higher sovereign rating: HSBC

Researcher points to nation’s capability to cover external debt, ample foreign reserves

Credit rating agencies should raise their sovereign credit ratings of Korea to better reflect its improved ability to finance external debt, Frederic Neumann, co-head of Asia research team at HSBC said Wednesday.

Commenting on Korea having the same rating Italy at Standard & Poor’s and Fitch Ratings, the Hong Kong-based economist said the ratings shared by the two at those agencies don’t accurately reflect their default risk.

“Korea is absolutely a different class from Italy so that should be reflected in ratings,” Frederic told reporters in Seoul.

“What has changed is the financial vulnerability of Korea. Less reliance on external debt, more foreign exchange reserves, and much lower reliance on wholesale funding equips the market with less need for government support should there be a financial crisis,” Neumann said.

Credit rating agency S&P currently has an A for Korea and Italy, two notches below Japan, Spain, China and Taiwan. Fitch rates Korea at A+, the same as China, Taiwan and Italy.

Neumann said the Fitch’s recent outlook upgrade of Korea to “positive” was a “right” thing to do.

“I think the upgrade is very much justified given its recent performance in dealing with the market volatility,” he said.
Frederic Neumann, co-head of Asian economics research at HSBC, speaks at a Seoul news conference Wednesday. (HSBC)
Frederic Neumann, co-head of Asian economics research at HSBC, speaks at a Seoul news conference Wednesday. (HSBC)

Fitch on Nov. 7 revised up the country’s sovereign credit rating to positive, citing stronger resilience in external balance.

Bank of Korea has foreign exchange reserves of $310.98 billion as of October, up $7.6 billion from September. It expanded its currency swap agreement with China and Japan last month, boosting its total foreign exchange reserves to around $450, meaning it now has more than enough to repay all of its $398 billion outstanding debt.

Neumann said Asia’s fourth-largest economy is becoming less vulnerable to the European debt crisis.

“Korea now has the second-highest share of its exports going to China and even that has increased quite noticeably in the last two years. It is also Asia’s only country where exposure to European banks have been declining,” he said.

Neumann predicted BOK to raise its policy rate next year to juggle the growth amid persistent inflationary pressure.

“The Bank of Korea’s next move will be up, not down ... Not any time soon, but (rate hikes will) probably come in March next year,” he said. HSBC expects a policy rate of 3.75 percent next year and 4.25 percent in 2013 for Korea.

BOK froze the key rate at 3.25 percent for fifth consecutive month last week, projecting a wait-and-see approach to the Europe’s debt crisis.

The British banking giant said while Korea’s exports will remain robust for some time, inflation would continue to be “very sticky and high.” Its inflation rate projection for 2012 is 3.6 percent, down from 4.4 percent estimated for this year.

“It makes sense to allow the Korean won to appreciate gradually over time to bring down regional inflation pressure,” he said.

Allowing the won to strengthen against major trading currencies usually helps to combat inflation, but it undermines the trade-dependent economy’s export competitiveness in the global market.

By Cynthia J. Kim (