Global ratings agency projects a 1-point rate cut by central bank to ease deeper-than-expected growth pressures
Fitch Ratings is expected to maintain its stable outlook on South Korea despite growing uncertainties, with fiscal discipline emerging as a key concern over the medium term, the agency’s sovereign analyst said Friday.
“Korea’s sovereign rating remains resilient even amid economic challenges from higher US tariffs and recent domestic political volatility,” said Jeremy Zook, director of Asia-Pacific sovereigns at Fitch Ratings, during a media briefing in Seoul following its annual country conference on Korea’s macroeconomic and sovereign outlook.
Zook noted that Fitch sees sufficient headroom in Korea’s current AA- sovereign rating with a stable outlook, reaffirmed in February, but warned that a significant rise in government debt could erode that buffer.
“The medium-term fiscal outlook and the trajectory of government debt will be important considerations for the sovereign rating going forward,” he said, adding, “We’ll assess the incoming administration’s policy once it takes office and unveils its budget."
Zook acknowledged that US tariff hikes will likely weigh on Korea’s near-term growth. While Fitch does not expect the full 25 percent tariff to take effect, a partial increase appears inevitable, with Korea projected to face an effective rate of around 15 percent.
He warned that tariff-related uncertainties could drag the country’s growth dangerously to below the current 1 percent forecast.
“We revised our forecast down to 1 percent last week, but following the latest first-quarter GDP figure, there appears to be further downside pressure,” Zook said.
Fitch cut its 2025 growth outlook for Korea to 1 percent last week, down from 1.3 percent, ahead of Thursday’s first-quarter data showing a 0.2 percent contraction. Zook noted it was an even weaker outturn than Fitch had expected.
The analyst foresaw the dampened domestic demand in Korea to recover gradually with the central bank's rate cuts. Fitch anticipated the Bank of Korea to ease the policy rate by 100 basis points over the remainder of the year, bringing the rate down to 1.75 percent.
"Subdued growth prospects, combined with easing inflation will prompt the further easing in monetary policy," he said.
Despite the slowdown, Zook said a temporary dip in growth is unlikely to affect Korea’s sovereign rating, so long as the country’s fundamental credit metrics remain stable.
He also downplayed concerns over recent political volatility undermining Korea’s governance or economy. "We believe Korea has sufficient external financing and fiscal buffers to weather a period of heightened political uncertainty."
jwc@heraldcorp.com
