Korea to issue FX bonds buoyed by solid ratings outlooks - The Korea Times
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Korea to issue FX bonds buoyed by solid ratings outlooks

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Deputy Prime Minister and Finance Minister Hong Nam-ki. Yonhap
Deputy Prime Minister and Finance Minister Hong Nam-ki. Yonhap

Korea relatively insulated from worldwide sovereign credit downgrades

By Lee Kyung-min

The Ministry of Economy and Finance plans to issue $1.5 billion (1.7 trillion won) worth of foreign exchange stabilization bonds (forex bonds) in the U.S. and Europe on the back of foreign investors' high assessment of the country's economy, as evidenced by stable sovereign credit ratings and outlook from three global rating agencies.

This is the latest effort to draw greater foreign investment via issuing dollar- and euro-denominated bonds at lower-than-expected yields, which translates into decreased overseas borrowing costs for local state-run and private firms.

Anchoring the plan is a number of key financial market indices reflecting foreign investor confidence in the country's overall economy and credit status, underpinned by continued COVID-19 containment measures and robust exports that led to limited economic contraction over the past year despite concerns surrounding the spread of Delta variants.

The credit spread between Korea's 10-year bonds issued last year and U.S. debt with the same maturity stands at a record-low 50 basis points.

The credit default swap, an indicator of a country's risk of national bankruptcy, stood at 18 basis points for Korea-issued forex bonds as of June, the lowest level seen since the global financial crisis in 2008. The lower the figure, the lower the risk.

Credit ratings

Standard & Poors (S&P), Moody's and Fitch Ratings left Korea's all-time-high credit rating and outlook unchanged this year, a notable feat given the pandemic-triggered economic recession resulted in downgrades of many of its 113 peers over the past year.

Among G7 countries, excluding Germany, six have seen either their sovereign credit rating or credit outlook downgraded, including the U.K., Canada, Italy, the U.S., France and Japan, mostly due to the pandemic.

The rating agencies view that Korea's external finances are strong, as indicated by its net external creditor position, current account surplus sustained from 1998 and high volume of foreign-currency reserves, a key defense mechanism against an exodus of foreign capital triggered by external shocks due to global financial market uncertainties.

They say factors that could lead to negative ratings or downgrades include a rise in government debt relative to GDP brought on by increases in the fiscal deficit.

A positive rating action or upgrade can be backed by continued current account surpluses that help the country keep its position as a net external creditor, providing greater resilience to external financial shocks.

The ministry announced the dual-tranche issuance of $1.45 billion in forex bonds with the record-low yield last September. The bonds comprised $625 million in 10-year dollar-dominated bonds with a yield of 1.198 percent and 700 million euros in five-year euro-denominated bonds with a negative yield of 0.059 percent.

This was followed by Korea Housing-Finance Corp. issuing 1 billion euros (about 1.3 trillion won) in a tranche of 5-year bonds with a record-low negative yield of 0.075 percent. It had a credit spread of 18 basis points between the benchmark euro mid-swap. Covered bonds are debt securities issued by a bank or mortgage institution, collateralized against a pool of assets in case of failure of the issuer.

About a week later, Korea Gas Corp. issued $800 million worth of global bonds with the record-narrow credit spread among state-run firms in Korea.

Current account surpluses

Solid exports will bolster Korea's current account surplus in the months to come.

Data from Korea Customs Service released July 21 showed that the country's exports amounted to $32.6 billion from July 1 to 20, up 32.8 percent year-on-year.

Exports are likely to increase for nine-straight months through July, extending the eight-month rise that began last November.

Korea registered a 3.94 billion won trade deficit during the 20-day period as imports rose faster than exports. Imports stood at $36.5 billion, up 46.1 percent, year-on-year.

But the cumulative trade balance from January to July 20 logged a surplus of $14.1 billion. This is a continuation of June's figure that reported a trade surplus of $4.5 billion, which extended the surplus for 14-straight months.

Exports rose to $54.8 billion won, up 39.8 percent year-on-year in June, on the back of increased outbound shipments of semiconductors and automobiles. Exports surpassed the $50 billion-mark for four-consecutive months and rose at the fastest clip for the month of June on record. Imports rose to $50.4 billion, up 40.7 percent.

Lee Kyung-min lkm@koreatimes.co.kr


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