By Lee Hyo-sik
Staff Reporter


Standard & Poor’s (S&P) said it has raised South Korea’s sovereign credit rating by one notch to ``A’’ from ``A minus,’’ citing a stronger banking sector and a flexible monetary stance. The ratings outlook remained stable, it said.

It is the first time in three years that an international credit rating agency has raised the nation’s sovereign rating.

``An improving financial sector and increased monetary flexibility prompted the upgrade, ‘’ S&P director Takahira Ogawa said in a statement.

The U.S.-based credit rating agency had maintained the ``A-minus’’ rating for Korea since July 2002, when it upgraded the rating by one notch from ``BBB+.’’

S&P’s upgrade came a day after U.K.-based Fitch Ratings decided to keep Korea’s national credit rating at ``A’’ with a stable outlook for three straight years since it last raised the rating to ``A’’ from ``BBB+’’ in June 2002.

U.S.-based Moody’s Investors Service has also kept Korea’s rating at ``A3’’ since March 2002, when the agency raised the ratings by two notches from ``Baa2.’’

S&P said that the nation’s banking sector has strengthened significantly since the last upgrade of the Korean government in 2002.

``The banking sector’s loan risk management systems have been upgraded and industry-wide profitability has nearly doubled to 0.8 percent average return on assets as of June 2005,’’ it said.

Corporate governance structure has also improved with outside directors now representing over half of directorships, it added.

The agency said that the greater flexibility of the won exchange rate also motivated the upgrade.

Ogawa said that the won has fluctuated more against the currencies of Korea’s major trading partners this year than in the past even though S&P would not characterize it as a freely floating currency.

``The won’s flexibility has given the Bank of Korea more room to conduct an independent monetary policy and it bolstered the country’s resilience to external shocks,’’ he added.

Korea’s strong external position also played a positive role in the rating upgrade with its rising net external assets and foreign exchange reserves fending off potential external shocks.

But it said that North Korea’s nuclear weapons development program still remains a constraint on Korea’s rating.

Ogawa said the resumption of the six-party talks should prevent an increase in geopolitical risk on the peninsula and further reduce the chance of military conflict and sudden reunification following North Korea’s economic collapse.

But S&P still remains cautious about the North Korean issue, saying that the ongoing talks will be protracted and inconclusive if participants conclude that North’s compliance is difficult to monitor.

``Future movement of Korea’s sovereign rating will be determined by developments in North Korea and the success of the Korean government in reducing the distortions of its own economy arising from labor inflexibility and government allocation in credit and guarantees,’’ Ogawa said.

Meanwhile, South Korea’s Asian rivals have also seen upgrades in their sovereign ratings over the past few years.

S&P raised sovereign rating for China to ``A-minus’’ last week and Moody’s upgraded its rating to ``A2’’ in September 2003

S&P also raised the sovereign rating for Hong Kong to ``AA-minus’’ last week from ``A+,’’ while Singapore has had the highest rating of ``AAA’’ for the past few years.

Japan and Taiwan currently hold ``AA-minus’’ sovereign ratings from S&P, two notches higher than Korea’s ``A’’.

leehs@koreatimes.co.kr