Geopolitical Challenges for South Korea

By Jihoon Lee and Youn Ah Moon

SEOUL (Reuters) – Global credit ratings agency Fitch stated it is “quite closely” monitoring South Korea’s geopolitical management amid the ongoing US-China trade war.

“Korea is caught between the U.S. and China, and balancing that relationship will become more challenging as trade tensions escalate,” said Jeremy Zook, Asia-Pacific director of Fitch Ratings, in a Reuters interview on Thursday.

Fitch downgraded China’s credit rating from “A+” to “A” earlier this month, expecting a continued weakening of public finances due to sustained fiscal stimulus alongside subdued domestic demand and rising tariffs.

The U.S. and China have raised tariffs against each other by more than 100%, effectively severing trade between South Korea’s two largest trading partners. South Korea, a key U.S. ally, also faces 25% U.S. tariffs.

Zook highlighted the shift in the global trade system as the primary challenge for South Korea’s trade-reliant economy, although Fitch does not anticipate any immediate changes to its “AA-” rating.

On Thursday, a South Korean delegation will meet with Trump administration officials to discuss reducing tariffs. These talks occur amid South Korea’s worst political crisis in decades due to former President Yoon Suk Yeol’s unsuccessful martial law attempt. A snap presidential election is set for June 3.

Zook mentioned the uncertainty surrounding the new administration complicates future negotiations for Korea. South Korea’s economy unexpectedly contracted in the first quarter, leading to expectations for additional interest rate cuts.

Zook, who no longer views South Korea’s public finances as a credit strength, noted that there is some capacity for additional fiscal support to mitigate growth challenges in the near term. “There’s still fiscal headroom at the current rating level to manage a supplementary budget this year, and potentially another after the election,” he said.

Fitch projects South Korea’s economic growth for this year at 1.0%, down from 1.3% in March, with potential for further downside following the latest data release.