Korea's GDP forecast to grow 1.1 percent in 2023: S&P

Analysts from S&P Global Ratings attend a press conference held at the Seoul Finance Center (SFC) in central Seoul, Wednesday. Yonhap

APAC banks retain stable outlook amid increased risks for U.S. banks

By Anna J. Park

Korea's GDP is expected to grow by 1.1 percent this year amid weaker demand and fading re-opening benefits, according to forecasts by S&P Global Ratings. However, in the longer term, the growth trend will ease to around 2 percent for the period from 2026 to 2030.

Louis Kuijs, chief Asia economist at S&P Global Ratings, forecasts that Korea's GDP will grow 1.1 percent in 2023 and 2.4 percent in 2024.

"Korea has gone through a very impressive economic performance in recent decades. The coming decade will become a little more challenging if you look at demographics, but also the additional possibility of weak productivity growth. That is why we expect the longer-term growth trend to move to around two percent for South Korea," Kuijs said during a press conference held in central Seoul, Wednesday.

The chief economist also expects Korea's central bank to start lowering its key interest rate from next year, given that the U.S. Federal Reserve is expected to start reducing its key interest rate as early as next year.

"Generally speaking, Korea's inflation is not as much of a big problem as it is in the U.S., in our view. But inflation in Korea is not as much under control as policymakers here would like, and that is why we do not think that the Bank of Korea (BOK) will be in a position anytime soon to start lowering its interest rate. Thus, we think Korea's policy rate will start to come down from next year," Kuijs explained.

Analysts from S&P Global Ratings attend a press conference held at the Seoul Finance Center (SFC) in central Seoul, Wednesday. From left, S&P Global Ratings' Head of Financial Services, Government and Structured Finance Vera Chaplin, Asia-Pacific Chief Economist Louis Kuijs and Senior Director of Sovereign & International Public Finance Ratings Kim Eng Tan. Korea Times photo by Anna J. Park

With regards to sovereign credit risks in the Asia Pacific region, Kim Eng Tan, S&P Global Ratings' senior director of sovereign and international public finance ratings, said Korea's government debt remains low.

"Not only did the Korean government not run very many deficits in the past few years, but also the overall debt level in Korea remains low," Kim Eng Tan said during the press conference, maintaining Korea's current sovereign ratings of "AA," the third-highest level on the ratings agency's table.

Although Korea's public enterprise debts have risen recently, the sovereign credit analyst remains optimistic. He attributes the increase in debt of public companies mainly to rising global energy prices and a failure to swiftly adjust utility fees in the country, as seen in the case of the Korea Electric Power Corporation (KEPCO). The Korean government also has a successful track record of significantly reducing public enterprise debt in the middle of the 2010s. Yet, he warns that if the public enterprise debt continues to grow, it could be a problem.

Household debt in Korea, meanwhile, remains at one of the highest levels in the world. The analyst said, according to the Bank for International Settlements (BIS), the ratio of Korea's household credit to its GDP stood at the third-highest level in the world, as of the third quarter in 2022, only following Switzerland and Australia.

"Every country has a different debt-sustaining capacity; just because you have the third-highest debt doesn't mean that your country is the third-riskiest in the world. However, it is still true that household debt in Korea is very high. More importantly, Korea's household debt service ratio (DSR), which is an important indicator of how well households sustain these debts, has been deteriorating," Kim Eng Tan highlighted.

He added that the high household debt in times of high-interest rates could burden household expenditure, taking away the growth momentum of domestic demand.

As to the stability of Asia Pacific banking sectors, Vera Chaplin, head of financial services, governments and structured finance ratings at S&P Global Ratings, said she maintains a stable outlook for APAC banks.

"Overall, the banking sector in the Asia-Pacific region remains resilient. We have not seen a meaningful contagion for Asia Pacific banks from the global banking industry. Of course, funding costs and spread have increased for some banks, particularly with lower-rated banks, but in general, banks in the Asia-Pacific region can withstand higher funding costs and other knock-on effects from increased volatility in some global banking sectors," Chaplin said during the press conference.

Chung Hong-taik, senior director at the global rating firm, overseeing Korea's banking industry, explained that although Korean banks might witness some weakening of their asset quality, they are assessed to be well-managing risk factors, such as real estate project financing in their portfolio structures and their liquidity remains stable.