Standard and Poor’s (S&P), one of the big three global credit rating agencies, has slashed its growth outlook for South Korea’s economy this year to 2.0 percent from 2.4 percent.
S&P joins the growing list of overseas agencies that have lowered their estimates of Korea’s economic growth to around 2.0 percent, believing that Japan's tighter regulations on some high-tech exports to South Korea will serve as a new downside risk to the economy.
The South Korean government still maintains its projection that the economy will grow 2.4 percent to 2.5 percent this year.
“High inventory levels, mainly in the electronics sector, and rising uncertainty about the global trade outlook will continue to weigh down production and private investment,” S&P said in its quarterly Asia-Pacific report released on July 10. “Meanwhile, the labor market is relatively vulnerable and is weakening consumption,” it added. The agency slashed its forecast for South Korea’s gross domestic product (GDP) for the second time in three months after April when it cut the figure from 2.5 percent to 2.4 percent. It also projected that the Bank of Korea could slash its benchmark interest rate by 0.25 percentage point within the year. S&P also lowered its Asia-Pacific growth outlook to 5.1 percent in both 2019 and 2020 from 5.2 percent.
Previously, U.S. investment bank Morgan Stanley lowered its growth projection for South Korea for this year from 2.2 percent to 1.8 percent, citing an additional downward pressure on the country’s economy by Japan's export curbs. The other two global credit rating agencies – Moody's, and FitchRatings – also cut the figure to 2.1 percent and 2.0 percent, respectively. The latest downgrade came a week after the South Korean government announced its economic growth outlook at 2.4 percent to 2.5 percent. Deputy Prime Minister and Minister of Strategy and Finance, Hong Nam-ki announced an economic policy direction for the second half in a parliamentary session on July 3, saying, “I don’t think that Japan’s restrictions on exports of key semiconductor materials have such an impact on the Korean economy as to necessitate a revision of the growth outlook.” His remarks stirred up a controversy over his ability to diagnose the country’s economic conditions.
S&P also presented a gloomy outlook for the credit ratings of South Korea’s top 200 companies. In a separate report on credit risks of Korean companies, S&P said that the credit quality of South Korean companies is on a downward trend as a result of stalled earnings. It noted that the trade friction between South Korea and Japan is one of the factors raising the risk of lower credit ratings of South Korean firms.”
It also added, “South Korean companies recently posted lower earnings due to the slowdown of global demand and heightening trade tensions and they would experience a downward pressure on their credit quality over the next 12 months. The semiconductor, smartphone, car and oil refining and chemical industries which are heavily dependent on exports will face a difficult business environment over the next one and two years. Many South Korean firms have introduced an aggressive financial policy to expand capital expenditure (capex) and shareholder returns despite the decline in cash flow from operations, taking more pressure. The difficult business environment and negative flow of credit ratings will continue for a while.”
Earlier on July 2, Moody’s said, “There is concern that Japan’s export curbs can adversely affect the credit quality of South Korean companies, such as Samsung Electronics Co. and SK Hynix Inc.”