U.S. President Joe Biden speaks about his economic agenda after visiting a new computer chip plant for Taiwan Semiconductor Manufacturing Company in Phoenix, Dec. 6. AP-Yonhap

This article is the first in a series of interviews with chief economists and analysts covering the Korean economy and industries on what the global credit rating agencies expect for next year amid rising interest rates and high inflation. _ ED.

Bank of Korea forecast to continue hiking rates until 'early 2023'

By Kim Yoo-chul

While the overall global supply chain risks remained ever-present throughout most of South Korea's key export markets, which include North America and China, one noticeable industry trend is that batteries have become crucial for facilitating the global energy transition.

The reason is clear. The world is increasingly swapping fossil fuel power for emissions-free electrification, while the massive transition to electric vehicles (EVs) by leading carmakers is bringing about a substantial acceleration in battery manufacturing. The passage of the Inflation Reduction Act represents the U.S.' goal to address climate change as the act mandates the provision of tax credits for manufacturing within critical industries.

Given the fact that broader and more ambitious policy portfolios are currently being applied by governments in a bid to further accelerate the transition, leading South Korean battery manufacturers and carmakers are set to maintain their solid credit profile next year as the transition to EVs is still raising significant growth opportunities across the value chain, according to senior credit experts.

Acting on the opportunity will require substantial and steady facility investments and could possibly create risk for manufacturers' flagship products and core businesses, with officials and company executives trying hard to seize the "right moment" to expand their revenues.


Chris Park, associate managing director at Moody's Investors Service, said South Korea's leading exporters will face the challenge of keeping their cash flow stable next year, but he remained positive in his outlook for the credit profiles of LG Energy Solution (LGES), Hyundai Motor and its sister Kia as the EV transition is still underway.

"LGES will continue to benefit from strong demand growth for EV batteries globally," Park told The Korea Times in a recent interview. "For Hyundai Motor and Kia, overall profitability will remain robust, as continued improvement in product mix and the large backlog orders will offset the negative impact of a softening in demand, higher incentive expenses in the U.S. and the stronger South Korean won."

Nonetheless, the managing director didn't comment on the possibility of the credit rating agency revising its ratings on them. Regarding requests for its view on the country's top steel manufacturer POSCO, Park said, "POSCO is vulnerable to the uncertain economic outlook for China, which accounts for the bulk of steel demand in the region." China is the largest steel-producing country, and it is expected to face pressure next year from weak property investment and slower infrastructure fixed-asset investment (FAI).

Chris Park, left, associate managing director at Moody's Investors Service, and Moody's Analytics Associate Economist Dave Chia

Despite increasingly unfavorable signs concerning growth amid the growing likelihood of a recession in developed economies and a persistently high-interest rate, chances are low for leading South Korean exporters to see a rapid deterioration of their cash flow.

"Key risks facing many export industries in Korea are seeing a slowdown in demand. Many of these companies also face the challenge of preserving their balance sheet strength against weaker cash flow and sizeable capital expenditure. However, for companies like Samsung Electronics, Hyundai Motor and POSCO, this risk is mitigated by their large financial buffers," Park said.

Central bank base rate to peak in early 2023

The South Korean economy, Asia's fourth-largest, has recently warned of a "deeper economic slowdown," than expected throughout next year with the finance ministry expecting the economy to only grow 1.6 percent in 2023.

One of the top concerns of investors and also expectations is over when the Bank of Korea (BOK) will start cutting its benchmark rate in order to stimulate the worsening economy. But cutting the base rate is something that the BOK can't handle alone, as it will have to review and assess the level of the U.S. Federal Reserve's rates before making its rate decisions. Major investment banks were saying the U.S. economy would enter a recession around the middle of 2023, pushing the Fed to cut rates at the end of next year.

Dave Chia, an associate economist at Moody's Analytics, said that given the still-elevated inflation, the BOK will continue to hike rates until early next year.

"The BOK will want to avoid any significant widening in the interest rate differential with the U.S. to protect the value of the won and shield South Korea from imported inflation. The BOK is expected to ease the pace of monetary policy tightening, bringing the base rate to a peak early next year," Chia said in a separate interview.

The BOK's current benchmark rate is at 3.25 percent with BOK Governor Rhee Chang-yong telling reporters that it's too early to talk about the possibility of rate cuts. During a rate-setting meeting in November, the majority of the BOK's monetary board members expected the upper limit of the rate hikes to reach 3.5 percent.

A board on the floor of the New York Stock Exchange (NYSE) shows a steep decline on Dec. 15. AFP-Yonhap

"We expect inflation to moderate in 2023 with the easing of energy prices. Nonetheless, South Korea's annual inflation will remain higher than pre-pandemic levels in the near term. Core inflation is expected to stay strong as demand-side inflation pressures build," the economist said.

Chia pointed out that the South Korean government "has scope to extend the liquefied natural gas (LNG) relief and postpone or stagger the reintroduction of the food tariffs but depending on how inflation progresses." In a bid to curb high living costs, Seoul removed import tariffs on some food products and LNG. These relief measures were set to expire at the end of 2022, but the LNG relief has since been extended to March.

"Rapid tightening by central banks is also a concern for those economies where households and businesses hold very high levels of debt. South Korean households, for example, hold high levels of property-related debt. Much of this debt is subject to variable rates, so when interest rates go up, higher debt servicing costs quickly hit," Chia responded.

South Korea's high level of household debt is seen as a key risk factor for the economy. During the pandemic, household debt soared on the back of monetary easing and accommodative fiscal policies. But with central banks around the world raising base rates to tackle inflation amid the growing possibility of a global economic slowdown, experts said some aspects of household debt are becoming riskier than others. The BOK's continued tight monetary policy is viewed as one of the factors dampening private consumption and causing asset price adjustments.

As of the end of the third quarter of this year, the nation's total household debt remained at 1,756.8 trillion won, a slight decrease from the second quarter when it recorded 1,869.4 trillion won.

"In general, economies in Asia are in a much better position than in the past. This is true, especially in comparison with the lead-up to the Asian Financial Crisis of 1997-98. Governments' dependence on foreign-currency borrowing is generally lower. Current account positions and foreign exchange reserves appear fairly robust," he said.