The sovereign rating of South Korea should be upgraded immediately. Its present level of BBB/Baa2 is simply not consistent with the remarkable turnaround of its economy in the last year and a half. The country now has $82 billion in foreign exchange reserves, a 2% current account surplus and 1999 FDI capital inflows of $13 billion, allowing the country to be a $10 billion net external creditor. The ratios speak for themselves: less than 30% of its total liabilities are due in two years or less, and its forex reserves cover these liabilities by 200%.
Compare these figures with the end of 1997 when the country was last downgraded. Then 40% of all liabilities were due in less than two years and the forex reserves only covered 35% of those liabilities. Indeed, the country was downgraded precisely because of this external liability squeeze - the agencies felt that its sovereign forex reserves could not cover its short-term external debt.
The rating agencies thought the situation was so severe that Standard and Poor's felt obliged to move the rating from a AA- level in October 1997 to a B+ level at the end of December 1997, a shift which made a mockery of the whole rating process. Ratings should have a horizon of three years, and the rating agencies succumbed to overly hasty actions.
Dramatic improvement
Today, as the external liability situation in South Korea has improved so dramatically, one would expect the agencies to have followed suit and upgraded the country. In fact, South Korea's foreign currency rating has only gone up to BBB - below the level it was in mid-1997 when such figures were far worse.
The agencies have shifted the goal posts. They are now saying that contingent liabilities are putting a restraint on the rating of the sovereign because it might be called in to bail out recalcitrant banks and companies who refuse to pay their debts. While this may be true, and contingent liabilities are one of the larger risks facing the sovereign, it simply is not consistent with the reasons that were used to downgrade the country.
Consistency of approach demands that South Korea be upgraded, or else the agencies should give a clear indication of what criteria they use to make their rating decisions. In the meantime, Korean companies are paying more than they should do in the international bond markets with no idea when the situation will be rectified.
