| Deputy Prime Minister and Finance Minister Hong Nam-ki / Yonhap |
By Lee Kyung-min
Korea's credit default swap (CDS) premium, an indicator that shows the country's risk of national bankruptcy, hit its lowest level since the global financial crisis in 2008, advancing the prospect of a faster economic recovery amid the COVID-19 pandemic, the finance ministry said Thursday.
The CDS premium is a fee paid for guaranteeing the recovery of a principal in the event of a bond default, a reason why it is considered an insurance premium charged for the risk of bond default. The lower the premium, the lower the risk of default.
This bodes well for Asia's fourth-largest, export-reliant economy in need of steady, hefty investment from overseas amid a turnaround in the financial market conditions showing clear signs of recovery.
Global investors are increasingly warming towards risk-on sentiment, indicated by the U.S. S&P 500 jumping 4.9 percent as of Thursday compared to March 31. Dow Jones and the tech-heavy Nasdaq reported respective increases of 3.8 percent and 2.5 percent in the same period. Also stabilizing are concerns over rising U.S. 10-year Treasury notes that peaked at 1.74 percent as of March and have since inched down.
The Ministry of Economy and Finance said the premium on the country's five-year government bonds stood at 19 basis points in the financial markets in New York, May 5 (local time).
This is the lowest since 2008, and the de facto all-time low excluding the previous low 14 basis points recorded in April 2007, when the trading volume was extremely low and therefore the figure should be considered statistically insignificant.
The continued downtrend of the figures since the second half of 2017 was briefly broken after it spiked to a high of 57 basis points on March 23, 2020, around the beginning of the pandemic. But the figure has since stabilized rapidly.
Korea's CDS premium is 17th-highest among the global economies, and the lowest among emerging economies. For context, the figure for France is 23 basis points and for Canada 18 basis points.
Deputy Prime Minister and Finance Minister Hong Nam-ki said Korea's low CDS premium reflects strong confidence in economic recovery expressed by foreign investors, underpinned by robust fundamentals and marked resilience following ― and despite ― the pandemic.
"The government will spare no efforts to better manage risks both domestically and abroad, a step towards enhancing external credibility," he said.
The Korean economy reported a contraction of only 1 percent last year, a notable feat compared to advanced economies that logged high-single and double-digit contractions.
Korea has reported 10 consecutive months of current account surplus from May 2020 through February. It has $452.3 billion in foreign exchange reserves, a safety net against external shocks, standing the ninth-largest in the world as of April.