Global credit rating agency Fitch warned that South Korea's economic growth rate could fall to around 0% this year. This is due to the unresolved uncertainties surrounding the United States' reciprocal tariff policy and domestic politics, which could amplify downward pressure on the economy. Taking this into account, Fitch forecasted that the Bank of Korea will reduce the base rate by another 1 percentage point (p) within this year. This is a more aggressive easing measure than the market expected.
◇ "South Korean economy faces headwinds from reciprocal tariffs and sluggish domestic demand"
Jeremy Jook, director of Fitch's Asia-Pacific sovereign ratings, noted at the 'Fitch on Korea 2025' conference held at the Conrad Hotel in Seoul on the 25th that "the South Korean economy will face various headwinds, including tariffs from the United States, export stagnation, and weak domestic demand."
Jook stated that "if the United States' reciprocal tariffs are implemented, it could significantly impact export-oriented countries in the Asia-Pacific region, including Vietnam and South Korea," adding that "Fitch has lowered its growth rate forecast across the board this month, and if reciprocal tariffs are introduced, there is a possibility of further downward adjustments."
Fitch had already downgraded South Korea's growth rate forecast from 1.3% to 1.0% in its economic outlook report released last week. Jook's comments indicate that South Korea's growth rate could potentially drop to around 0%. In relation to this, Jook mentioned during a press conference held after the conference that "the revised forecast assumed that through negotiations between the two countries, the United States' tariffs on South Korea would be adjusted to 15%." He added that if the tariff rate rises above this level, the downward risks would increase.
Jook pointed out that South Korea's sluggish domestic demand is more severe than expected. He evaluated that "the GDP growth rate for the first quarter in South Korea was lower than our expectations" and added that "the fact that the growth momentum was lower than initially anticipated at the beginning of the year will exacerbate downward risks." According to the Bank of Korea, the GDP in the first quarter of this year fell by 0.2% compared to the previous quarter, marking a reversal after three quarters.
However, Fitch positively assessed that negotiations between South Korea and the United States have made progress and that the uncertainties in domestic politics have also eased. Jook stated that "it appears that the two countries will reach some level of agreement as a result of the recent '2+2 trade consultations' held overnight," adding that "the Constitutional Court's ruling in favor of former President Yoon Suk-yeol has also led to a trend of easing political uncertainties."
Taking these points into consideration, Fitch has maintained South Korea's credit rating at 'AA-' with a 'stable' outlook. Fitch has kept the same rating since adjusting South Korea's credit rating from 'A+' to 'AA-' in 2012. Jook assessed that "the South Korean economy shows resilience based on ample fiscal resources despite tariffs and political volatility" and that "it can manage short-term difficulties."
◇ "Expecting to lower the base rate by 100bp… possibility of a second supplementary budget after the presidential election"
Jook anticipates that the South Korean government will adopt an accommodative monetary policy, forecasting that the base rate will be lowered by an additional 100bp (1bp=0.01%p) from the current annual rate of 2.75% by the end of this year. Assuming a reduction of 25bp each time, this implies that the Bank of Korea will lower the base rate four more times.
This is even more accommodative than what the Bank of Korea and the market expected. Previously, Governor Lee Chang-yong of the Bank of Korea mentioned at the Monetary Policy Committee in February that the market anticipated 2 to 3 rate cuts (50-75bp) this year, noting that "the Bank of Korea's forecast is not significantly different." Although the possibility of additional cuts was mentioned at this month's Monetary Policy Committee meeting following the implementation of reciprocal tariffs, the market views it as difficult for the final interest rate to fall below 2.0%.
Jook stated that "the Bank of Korea will consider the growth slowdown more than the potential financial instability due to increased household debt" because "while inflation rates are being controlled, growth rates may fall lower than expected due to economic downward risks." He continued, saying, "In this situation, the Bank of Korea may have room for further easing of interest rates."
He forecasted that the South Korean government will also pursue an expansionary fiscal policy to stimulate the economy. Jook stated that "a substantial supplementary budget will be organized," adding that "after the presidential election in June, a second supplementary budget may also be pursued."
Regarding concerns over increased national debt due to the supplementary budget, he mentioned that "even if South Korea's national debt remains at a high level for the next few years, or if the supplementary budget is established on a larger scale than expected, it will not impact the sovereign rating," stating, "I believe that South Korea has the capacity to undertake bold fiscal measures."