Banking sector woes pose biggest risk to S. Korean sovereign rating: Fitch

By Lee Minji
SEOUL, June 20 (Yonhap) -- Global credit appraiser Fitch Ratings said Monday that problems in the South Korean banking sector and the level of household debt are the biggest risks to the country's sovereign rating.
"I think Korea's favorable economic performance through the crisis and strength in public finances compared to other countries are factors that could lead us to take positive action at some point," Andrew Colquhoun, head of Asia-Pacific Sovereign Ratings, told Yonhap News Agency in an interview.
"However, the ratings have been held back out of concerns over how much negative news there is to come from the banking system as well as politics."
Fitch currently holds a "stable" outlook and an "A+" rating on South Korea.
According to Colquhoun, South Korea's public debt is at a quite moderate level compared to other advanced OECD countries, with its budget projected to return to surplus this year.
But risks, especially financial sector risks, could pose a threat to the country's sovereign rating profile.
"I wouldn't expect situations from the North to change in the next 18-24 months. The question is whether negative news materializes from the financial sector," he said.
South Korea has been tackling lingering inflationary pressure and snowballing household debt. Outstanding household lending by local banks and non-bank lenders was estimated at 606.9 trillion won (US$560 billion) as of the end of April, an increase of 4.6 trillion won from a month earlier.
"Unless and until authorities and banks come clean about the losses they have already and the kind of stress cases, what they look like, ultimately there will be uncertainties that will continue to weigh on the credit profile," said Colquhoun.
"It seems likely that as monetary conditions tighten, as the Bank of Korea raises interest rates, there's probably going to be more bad news to come from that area."
Ballooning household debts are a major source of headache for policymakers as Korean households have to shoulder heavier burdens to service debt amid rising interest rates.
The government is expected to unveil a comprehensive package of measures to subdue household debt within this month amid mounting worries about its negative fallout.
mil@yna.co.kr