Korea’s credit fundamentals remain firm amid political crisis: Fitch

South Korea’s credit rating remained unscathed by the political turmoil caused by the short-lived martial law declaration of President Yoon Suk Yeol, said global credit rating agency Fitch Ratings. But the rating agency warned of a potential rise in downward pressure on the country’s economic credit if the crisis persists.

“Downside risks would increase in the event of a protracted political crisis or if sustained political divisions erode policymaking effectiveness, economic outcomes or fiscal management,” Fitch said in a report released on Friday in response to President Yoon’s martial law decree on Tuesday night, which was repealed by the National Assembly a few hours later.

“Political volatility could add to downside risks around our forecast of 2.0% economic growth in 2025, which was recently reduced from 2.7%” given that Korea faces multiple headwinds internally and externally such as trade risks, added Fitch.

Its warning echoed the earlier concern of its global peer Moody’s, which also warned of a negative impact on Korea’s sovereign rating if political chaos triggered by the martial law debacle is prolonged.

But both credit rating agencies have kept their sovereign rating of Asia’s fourth-largest economy unchanged for now, noting that the country’s firm institutional foundation is expected to deal effectively with the current political crisis.

STRONG INSTITUTIONAL FOUNDATION

“Our base case is that it will not materially and durably undermine institutional quality or threaten the economic and external finance credit strengths underpinning the sovereign’s 'AA-'/Stable rating,” according to the Fitch report.

It said the prompt actions taken by the Bank of Korea and the Ministry of Economy and Finance to stabilize the Korean financial markets and economy in the aftermath of the swift lifting of the military ruling have proven Korea’s capability to manage financial risk.

“Korea’s governance metrics, based on World Bank data, are strong and have generally improved over the last decade, despite political divisions,” said the report. “The country has experienced bouts of political volatility, including the impeachment of President Park Geun-hye in 2016-2017, without major damage to the sovereign credit profile.”

But it said the short-lived martial law could still impair investor views about the country’s political risks.

Fitch has maintained Korea’s sovereign rating at AA-, its fourth-highest rating, since 2012.

Moody’s and S&P also kept their ratings unchanged at Aa2 with a Stable outlook and AA with a Stable outlook, respectively, despite the political chaos triggered by the short-lived martial law.

After the National Assembly revoked Yoon’s martial law decree, it is set to vote to impeach the president over an allegation of committing “insurgency.”

The impeachment vote is scheduled for Saturday.

Write to Kyung-Min Kang at kkm1026@hankyung.com
Sookyung Seo edited this article.