Saturday, May 12, 2007

‘No Credit Rating Upgrade Without Nuclear Solution’

Korea is unlikely to see its credit rating rise until the North Korean nuclear issue is resolved, a Fitch Ratings analyst said Friday.

``It is difficult for the rating to move in the absence of a long-term solution to the North Korea nuclear issue,'' said James McCormack, the agency's Asian sovereign ratings head, at a press conference held in downtown Seoul.

``It has a stable outlook, which implies we're not likely to change that rating in the next 18 to 24 months. Our expectation is that it will probably stay at A+.''

He said the most critical factor determining Korea's credit rating is the cost of unification, adding that this would be huge, though it would differ depending on the method adopted. When disregarding the security risk and the unification cost, however, there is no problem in Korea that needs to be resolved immediately, according to McCormack.

Fitch raised Korea's rating in October 2005 following an agreement to remove nuclear weapons from the Korean Peninsula. However, North Korea marched out of talks following the United States' financial sanctions, and conducted a nuclear test in October last year. It promised steps toward the nuclear disarmament again on Feb. 13.

He expected Korea's government debt to be around 40 percent of gross domestic product (GDP). Other countries with similar credit ratings as Korea, however, have a debt at around the 30 percent level, McCormack said.

He noted that the increasing external debt needs watching as this increased markedly at banks during the financial crisis. Short-term external borrowing has been surging as foreign banks operating in Seoul have brought in dollars to engage in speculative foreign currency trading. However this wouldn't affect credit ratings, as Korea's foreign exchange reserves are also increasing, McCormack said.

Regarding Korea's signing of a free trade agreement (FTA) with the United States, he said it isn't likely to have an effect for a year or two. In the long term, however, it would give a positive effect as exports will surge as will foreign direct investment.

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