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Gov't, experts say Korean economy's fundamentals remain strong
By Anna J. Park
Korea's credit default swap (CDS) premium, a representative indicator that shows the country's risk of bankruptcy, has not only reached the highest point for this year, but it has also reached its highest level during the pandemic outbreak. As the CDS premium is an insurance premium charged for the risk of bond default, it is understood that the lower the premium, the lower the risk of bond default.
Korea's five-year CDS premium logged 55.23 basis points (bp) in New York as of Wednesday, which is an increase of 4.23 bp from the previous trading session. It is close to the 56 bp logged during March 2020, when the local stock market plunged as fears grew concerning the spread of COVID-19.
The country's five-year CDS premium remained at below 20 bp up until the start of this year. During recent months, the premium hovered at around 30 bp until early this month. But it drastically soared by some 20 bp ― a whopping 66 percent ― during the past week due to globally strengthened risk-averse sentiment amid the U.S. Fed's accelerated moves to tighten global liquidity and worsening geopolitical uncertainties.
However, the Korean government as well as market watchers argue that it is too hasty to diagnose the increase in the default premium as a sign of the start of any significant national financial crisis. They say, despite the soaring foreign exchange rate and CDS premium, Korea's macroeconomic fundamentals remain solid and stable, different from how they were during the past two major financial crises.
"The ongoing increase of the won-dollar exchange rate is mainly attributed to external macroeconomic factors, including the U.S. Fed's tightening of monetary policies and the dollar's strengthening against major currencies. The Korean economy still maintains both its internal and external soundness, which is different from the past two cases of major global financial crises," Bank of Korea (BOK) officials said during a parliamentary meeting earlier this week.
Global credit appraiser Fitch Ratings also reaffirmed Korea's sovereign rating at AA-, maintaining its stable outlook on the Korean economy on Wednesday.
The fact that the Korean government has turned into a net creditor country since 2014, with an insignificant portion of short-term foreign loans, also supports the stance that the Korean economy is fundamentally in strong shape.
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