Fitch Maintains South Korea's Credit Rating at AA-... Risks from Aging Population and Debt Increase (Update)

"Potential Growth Rate Lowered from 2.5% to 2.3%"

[Asia Economy Reporter Kim Suhwan] The international credit rating agency Fitch announced that it will maintain South Korea's credit rating at the current level of AA-. Fitch also stated that while South Korea's medium- to long-term outlook is stable, the rising national debt alongside an aging population poses a risk.

On the 21st (local time), Fitch maintained South Korea's credit rating at the current level of AA-, noting that the country's macroeconomic conditions remain favorable.

Fitch particularly highlighted that the South Korean government's effective COVID-19 containment measures, along with increased export volumes, are driving the economic rebound, which is expected to positively impact South Korea's credit rating.

However, Fitch analyzed that the rapidly spreading Delta variant virus domestically will suppress consumption recovery in the short term.

Fitch projected South Korea's economic growth rates to rise by 4.5% this year and 3.0% next year.

While Fitch expects South Korea to achieve stable growth in the medium to long term, it pointed out that the rapidly progressing aging population and increased debt due to changes in the government's fiscal rules pose risks.

Fitch downgraded South Korea's potential growth rate from 2.5% to 2.3%.

Fitch evaluated the South Korean government's large-scale investment plan, the 'Korean New Deal Policy,' as a strategy to address these medium- to long-term risks, but also noted that it is too early to determine whether the policy will have a substantial effect.

Fitch forecasted that South Korea's national debt will rise to 47.1% of its Gross Domestic Product (GDP) within this year. This is about 4 percentage points higher than the 43.8% national debt-to-GDP ratio recorded at the end of last year.

Fitch also stated that the new fiscal rule pursued by the South Korean government, which sets the national debt-to-GDP ratio at 60%, is likely to place a burden on government finances amid the rapidly progressing aging phenomenon.

However, Fitch predicted that national debt will decrease in the future due to the South Korean government's efforts to reduce fiscal deficits. Accordingly, Fitch added that South Korea's national debt will reach 54% of GDP in 2024, which is lower than the previously forecasted 58%.

Furthermore, while the recent sharp rise in housing prices is one of the vulnerabilities of the South Korean economy, Fitch assessed that the financial condition of domestic banks is sound and that household income levels are sufficient to manage debt, indicating that household debt risks are being appropriately managed.

In addition, Fitch noted that the prolonged standoff between North and South Korea continues to act as a structural threat to the South Korean economy in the long term.

This content was produced with the assistance of AI translation services.