Will Korea's Credit Rating Be Shaken by Martial Law... Following Moody's, Fitch Also Warns of 'Negative Impact if Prolonged'

Concerns Over Negative Impact on Korea's National Credit Rating

S&P Says 'No Substantial Impact'

Fitch Predicts 'Political Risk to Persist for Months... Downward Pressure on Credit if Prolonged'

Global credit rating agency Fitch assessed on the 6th (local time) that if the political risk due to the martial law situation prolongs, the downward pressure on Korea's credit rating could increase. Following Moody's, Fitch also highlighted the negative impact of prolonged political conflict and did not rule out the possibility of affecting Korea's national credit rating.

Fitch, in a report titled 'Korea's Credit Fundamentals Strong Despite Political Volatility,' stated, "If the political crisis prolongs or continuous political division weakens policy decision efficiency, economic performance, or fiscal conditions, the downward risk on Korea's national credit rating may increase."

However, the basic outlook does not threaten the economic and external credit that supports Korea's national credit rating of AA-. Fitch has maintained the fourth-highest AA- rating for Korea's national credit rating since September 2012. The rating outlook is 'stable.'

Fitch predicted that "the issues triggered by the declaration of martial law will be resolved through constitutional procedures" and diagnosed that "Korea's institutional checks and balances appear to be generally firmly maintained."

Additionally, the market risk is assessed to be manageable. It is explained that the rapid actions of the Bank of Korea and the Ministry of Strategy and Finance have eased pressure on the exchange rate and financial markets.

It also mentioned that the issue has already been experienced, such as the impeachment of former President Park Geun-hye by the Constitutional Court. Fitch stated, "Korea experienced political volatility, including the impeachment of former President Park Geun-hye in 2016-2017, but the national credit rating was not significantly damaged."

However, it is pointed out that the fact that martial law was declared, even temporarily, could affect investor sentiment. Political risk can negatively impact investor sentiment, and friction between the legislative and executive branches can raise concerns about the government's policy execution capabilities.

Fitch diagnosed that "if political uncertainty prolongs, it can weaken the confidence of households and businesses and put pressure on public finances."

Following Moody's, Fitch also pointed out that if the aftermath of President Yoon Suk-yeol's declaration of martial law is not promptly resolved, it could negatively impact government capabilities.

According to Bloomberg, Moody's Analytics, a subsidiary of Moody's, stated on the 4th that "if political conflict prolongs and affects economic activity, it will be negative for credit," indicating that Korea's national credit rating could be negatively affected.

Moody's Analytics diagnosed that "the deadlock surrounding the budget mentioned during President Yoon's declaration of martial law is not being resolved," and "numerous crises, including a fragile economic growth outlook, a geopolitically challenging environment, and structural constraints such as an aging population, could burden the government's ability to cope."

However, S&P, a pillar of the three major credit rating agencies, evaluated that the declaration and lifting of martial law have "no substantial impact" on Korea's national credit rating.

Kim Eng Tan, managing director at S&P, attended a press seminar jointly hosted by S&P and NICE Credit Rating in Yeouido, Seoul, on the 4th, stating, "Martial law was lifted within hours, and Korea's institutional foundation is judged to be solid," and "although it could have a negative impact on future investor decisions, there is no reason to change Korea's current credit rating (AA) in the current situation."

Despite the uncertainty, it is diagnosed that investors will focus on fundamentals (economic fundamentals).

Lee Hyuk-jun, managing director at NICE Credit Rating, said, "Even during the impeachment and presidential election period of President Park Geun-hye in 2016-2017, there was market fluctuation, but indices such as stock prices and interest rates returned to normal over time," and "investors make judgments based on fundamentals."

The credit rating industry is concerned that the declaration and lifting of martial law for the first time in 45 years could affect Korea's national credit rating. If the national credit rating is downgraded, it could impact Korea's economic growth, such as rising government bond yields.

Moody's has maintained Korea's national credit rating at Aa2, the third-highest rating in Moody's, since upgrading it from Aa3 in December 2015. Aa2 is the same rating as France and the United Arab Emirates. The national credit rating outlook is also 'stable.' S&P and Fitch have also maintained Korea's national credit rating stably. S&P also assigned the third-highest rating of AA among a total of 21 ratings in August 2016. International credit rating agencies pay strict attention to internal strife or political disputes in the country when evaluating credit ratings, drawing attention to future volatility.

Oh Jeong-min, Hankyung.com reporter blooming@hankyung.com