On September 14th South Korea received a ratings upgrade from Standard and Poor’s, being upgraded from A to A+. This upgrade follows a September 6th upgrade from Fitch, and an August 27th upgrade from Moody’s Corporation (NYSE:MCO). The one notch upgrade reflects increasing confidence in South Korea’s dynamic economy, and an ability to keep public finances in order. However, this move is not being welcomed by everyone, as some within South Korea are concerned that a strengthening Korean Won will hamper exports. Does South Korea have reason to fear?
The Ministry of Strategy and Finance has welcomed the move and noted that it should lower borrowing costs for South Korean businesses. With a public surplus of 2.3% and public debt equating to only 33.6% of the GDP, South Korea’s public leaders should be proud of their control over the economy and public finances.
On the other hand, some observers have noted that the ratings upgrade will also strengthen the Won, which could have negative effects on the export market. A strong Won will not be welcomed with an already weak global economy and slowing growth.
With the continued quantitative easing policies being implemented by the Fed in the United States, the dollar looks set to drop at the same time as the South Korean Won is rising. This is resulting in large fluctuations in the currency market, with the Won rising by 1 percent against the U.S. dollar in recent days.
While South Korea has been diversifying its export partners, the United States is still South Korea’s second largest trade partner, with some 10.1% percent of exports heading state-side. Large rises in the Won against the dollar have the potential to squeeze corporate profits for South Korean companies. And, as the Won rises against the dollar, it will also, undoubtedly, rise against other currencies. With exports totaling some USD 556.6 billion and with South Korea enjoying a trade surplus of over USD 30 billion, a strong Won could potentially hamper economic growth.
On the other hand, as South Korea completes its transition from a low-end manufacturing economy towards a high-tech diversified economy with a strong sector in high-technology manufacturing, a strong Won will make components from neighboring supply countries, such as Malaysia and China, cheaper to purchase.
Either way, stock markets in South Korea welcomed the upgrade, with the Kospi jumping 2.9 percent. The bonds market was mixed, with three and five year bonds dropping 1 basis point to 2.86% and 2.93 percent respectively. On the other hand, long-term bond rates rose, with 10 & 20 year bonds rising one basis point to 3.09 percent and 3.08 percent, respectively.
