OREANDA-NEWS. Indicating significant implied support from the government in a distress situation.

In our opinion, the chief weaknesses in Korea's credit fundamentals remain contingent liabilities and geopolitical risks on the Korean peninsula. Korea faces the prospects of bearing the uncertain, but likely heavy, cost of reunification if the regime of the Democratic People's Republic of Korea (DPRK; North Korea) fails. Periodic inter-Korean conflicts have at times affected Korea's economy and financial system. That said, Korea's strong institutions have helped to manage the spillover effects. We view the latest provocation by the DPRK from a missile launch into Japan's territorial waters as one that is not out of line with observed behavior in the past.

OUTLOOKThe stable outlook on the long-term ratings is predicated on our expectation that long-standing geopolitical risks will not escalate materially to the point of damaging Korea's credit metrics. We expect the rating to remain unchanged over the next two years. Beyond the outlook horizon, Korea's economic performance could revert to the mean of other developed economies as Korea's wealth levels rise further, its labor force ages, and Chinese growth moderates. We also believe that Korean household spending has become more sensitive to interest rate increases due to the significant rise in household leverage in recent years, which could act to constrain more rapid economic growth.

The stable outlook also indicates we do not expect the occasional tension with North Korea to escalate beyond what we have observed since its leader, Kim Jong Un, succeeded his father in 2011. We could raise the sovereign ratings if the Korean economy continues to grow significantly faster than our current expectations suggest, resulting in further improvements to its economic prosperity and resilience. We would lower the ratings if geopolitical tensions related to North Korea escalate to a point that affects South Korean sovereign credit metrics.