December 14, 2016 / 1:31 AM / 8 months ago

Fitch: Korea Instability Nearing an End, but Weaknesses Exposed

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, December 13 (Fitch) The lengthy political crisis that resulted in the impeachment of Korea's President Park Geun-hye has highlighted governance weaknesses, particularly those that stem from close ties between the country's large corporations and its government, says Fitch Ratings. However, Korea's political institutions appear strong enough to ensure an orderly and constitutional resolution without a significant negative impact on the sovereign credit profile. The constitutional court has 180 days to decide if Park's impeachment will be upheld, during which time presidential powers will be transferred to the prime minister. It is likely that a verdict will be reached much sooner - given precedents from the last presidential impeachment process in 2004, and the strong support for impeachment in parliament - which would set up a presidential election in the first half of next year, well ahead of December 2017 as originally scheduled. Political uncertainty is likely to hold back economic activity - by delaying investment and weighing on consumer confidence - until a new president is elected. However, we do not expect political disruption to severely affect economic activity in the medium term. Fitch still expects GDP growth of 2.5%-3.0% in 2017 and 2018, which is above the 1.6% median for 'AA'-rated countries. We affirmed Korea's rating at 'AA-' with a Stable Outlook in March 2016. The government's macroeconomic policy stance in the run-up to the election of a new president is likely to remain broadly unchanged. The 2017 budget has been passed, and corporate restructuring is well underway. We expect the restructuring to weigh slightly on GDP growth in the short run, but to encourage more productive allocation of resources in the longer run. It is unlikely that any progress will be made on other reforms that could lift structural growth, such as liberalisation of the labour market, until after the election at the earliest. In any case, it had already become unlikely that new far-reaching reforms would be pursued after Park's Saenuri party lost its parliamentary majority in elections in April 2016. The credit profile would be affected if the political situation were to develop in such a way that leads us to reassess governance standards. The crisis has highlighted shortcomings, but these are factored into our sovereign rating to a large extent. The World Bank's governance indicator, which we use in our criteria, gives Korea a score of 72.8 compared with a median of 80.9 among 'AA' rated countries, owing in large part to relatively weak control of corruption. It is possible that the strong public reaction to this scandal might eventually lead to weaker links between the state and the corporate sector, and a structural improvement in governance. However, changes in business culture are unlikely to happen quickly, and require government support beyond the presidential election. Korea's national assembly voted overwhelmingly to impeach Park on Friday, following six weeks of large-scale protests over allegations that she was improperly influenced by a friend, Choi Soon-sil, who held no official position. Choi has been arrested and charged with using her relationship with Park to press some of Korea's largest companies into donating almost USD70m to her foundations. Contact: Thomas Rookmaaker Director Sovereigns +852 2263 9891 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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