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Moody's sees China's slowdown as risk for Korean economy

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Published : 2014-02-20 14:53
Updated : 2014-02-20 15:04

South Korea's economy is not negatively affected by the U.S. Federal Reserve's tapering of quantitative easing, but its biggest risk stems from China's economic slowdown, Moody's Investors Service said Thursday.

"We see Korea's credit fundamentals are not adversely affected by the ongoing Fed tapering," Thomas J. Bryne, senior vice president at Moody's, told a group of reporters in Seoul.

The executive at the international ratings agency said that Korea's long-running current account surplus and a pile-up in foreign reserves will serve as a buffer for Korea in coping with possible negative impacts from the Fed tapering.

His remarks came as emerging markets jostled from the Fed's recent decision to reduce its monthly asset purchases again, now down to $65 billion, citing signs of improvement in the U.S. economy. The Fed announced in December its first scaleback of quantitative easing from $85 billion to $75 billion a month.

Bryne rather put much focus on China's economic slowdown as the main downside risk for the Korean economy as it affects Seoul's exports.

"(China's growth slowdown) affects market sentiment, and it also affects growth performances," he said, adding that if China's economy slows down to below 7.5 percent, it will probably have negative consequences on the Korean economy.

Bryne also cited Korea's household debt problems as a concern that could constrain consumer spending and monetary policy.

The Bank of Korea may not have an urgency to raise interest rates, given low inflation and no signs that the economy was overheating, he said, but as interest rates are on the rise globally, affected by the Fed's tapering, Korean households will face difficulty in repaying their debt.

According to the central bank, Korea's household credit totaled a record-high 991.7 trillion won ($934.5 billion) as of end-September, up 12.1 trillion won from three months earlier.

Moody's has retained its sovereign credit rating on South Korea at "Aa3," citing the country's "strong" fiscal fundamentals and "moderate" debt burden. (Yonhap)

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