External headwinds to weaken S. Korean economy: Moody’s


South Korea’s economic growth will decelerate over the next couple of years along with the global slowdown amid waning demand and trade frictions, Moody’s Investors Service said Tuesday.

The global ratings agency, however, noted that most local companies are forecast to enjoy stable corporate earnings next year thanks to the overall macroeconomic conditions.

“The Korean exports are exposed to the US-China trade tensions via supply chain linkages, and outlook for external demand and domestic labor market policies have weighed on confidence as well as investment,” Christian de Guzman, senior credit officer of Sovereign Risk Group at Moody’s, said in a media briefing held in Seoul.

Christian de Guzman, senior credit officer of Sovereign Risk Group at Moody’s (Yonhap)

Last week, the ratings agency trimmed the growth outlook for Asia’s fourth-largest economy to 2.5 percent in 2018 from its earlier projection of 2.8 percent, and gave an even more dismal figure of 2.3 percent for next year, which is 0.6 percentage point lower than its previous projection.

Its forecast is quite conservative compared to those by local state entities. The Bank of Korea put the growth outlook for 2018 and 2019 at 2.7 percent, and the state-run Korea Development Institute came up with levels of 2.7 percent for this year and 2.6 percent for 2019.

South Korea’s economy grew 3.1 percent in 2017 and 2.9 percent in 2016.

Pointing to the worsening US-China trade disputes and the quantitative tightening in advanced economies as well as higher oil prices, Guzman noted that the external operating environment took “a turn for the worse this year” and that “domestic uncertainties could exacerbate those pressures.”

Despite a thaw in inter-Korean tensions, the analyst said it is not satisfactory enough to affect Korea’s sovereign ratings as of now, calling the geopolitical risks one of the most crucial near-term constraints for Seoul.

“We’ve lowered our assessment of the geopolitical risks given many positive developments earlier this year, such as the summits between the two Koreas as well as the US and North Korea. But we still think the prominent and endurable easing of the bilateral tensions are far from certain,” he stated.

Despite such worsening global and local economic circumstances, however, Moody’s said the credit profiles of South Korean firms “should remain largely stable over the next 12 months.”

“We expect most rated companies to maintain broadly stable leverage in 2019, driven by healthy earnings and manageable, though increasing, capital spending,” Chris Park, associate managing director of Moody’s, said.

The escalation of the Washington-Beijing trade frictions would have a “manageable impact” on the Korean companies, though the spillover effects could be greater depending on the resilience of sentiment, he noted.

“By sector, we expect industry conditions in the technologies, steel, refining and chemicals sectors to weaken slightly but remain reasonably supportive in 2019, while earnings for auto and retail companies will remain low despite a likely recovery,” Park said. (Yonhap)

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