Korea’s risk of sovereign default has fallen to its lowest level since the global financial crisis of 2007-08, the Korea Center for International Finance (KCIF) said on Feb. 1.
The credit default swap (CDS) premium for five-year foreign exchange stabilization bonds saw an average of 32 basis points as of Jan. 31, lower than those of major economies such as the U.K. and France with 36.
The premium is an index measuring the default risk of an issuing entity, with a lower figure meaning reduced risk.
“The steady fall of Korea’s CDS premium reflects the positive view of the Korean economy,” the KCIF said. “Positive conditions in foreign currency supply such as the current account surplus are behind the falling CDS.”
“Political support should be provided to keep up the current account surplus despite external risks such as the global economic slowdown and trade tension.”
Despite rising volatility caused by trade tension between the U.S. and China that started last year and insecurity in emerging markets, the center said the Korean won’s value and Korean commercial papers have seen stable flow, highlighting their value as lower risk assets. The Korean financial market is also considered stable despite an expected economic slowdown thanks to the country’s continued current account surplus and large foreign currency reserves.
A positive factor in the lower default assessment is the anticipation surrounding the second North Korea-U.S. summit set for late February. In September 2017, the insurance premium against South Korea’s sovereign debt shot up to 76 basis points amid heightened geopolitical risk due to Pyeongyang’s missile launches and military provocations.
The figure has since plummeted, however, with improvement in inter-Korean relations last year in the wake of the PyeongChang 2018 Winter Olympics, three South-North summits and the historic inaugural summit between the North and the U.S., showing how expectations of peace on the Korean Peninsula have positively impacted the CDS premium.