Fitch Analyst: Stronger Yuan to Help Korean Economy

The appreciation of the Chinese currency will have a positive effect on South Korea’s economy, a senior Fitch analyst said Tuesday.

In an interview with The Dong-A Ilbo, Brian Colton, head of global economics and sovereign ratings at the international credit ratings agency, also said signs of a global economic recovery will likely have a positive impact on the South Korean economy.

China’s announcement that it will exercise flexibility on its foreign exchange rate will significantly reduce macroeconomic uncertainty and positively affect Asian economies, including South Korea’s, he said.

Colton, however, called the sinking of the South Korean naval vessel Cheonan a "serious incident" that could increase the country’s geopolitical risk, warning that it could affect the country’s sovereign rating.

In Seoul to attend a Fitch conference on global banking, he said South Korea’s geopolitical risk has always existed, but an incident such as the Cheonan sinking that resulted in a large number of deaths and raised regional tension will be taken more seriously.

He expressed an optimistic outlook for the South Korean economy, but advised Seoul to pay close attention to inflationary pressure.

A number of emerging economies have implemented pump-priming measures since the global financial crisis broke out, Colton said, and this could fuel inflation and force Asian economies that are recovering to change their macroeconomic policies.

On the fiscal crisis in southern Europe, the analyst said Greece’s troubles are unlikely to spread to other economies. Spain, Portugal and Italy will suffer from low economic growth over the mid- to long term, but are in a different situation than Greece because the fiscal policies of their governments have more confidence.

Colton downplayed a double-dip recession as unlikely, saying the Greek financial crisis is unlikely to spread further and major economics in Western Europe such as France and Germany are in the recovery phase.

On criticism that international credit rating agencies were not as aggressive in downgrading the sovereign ratings of financially troubled southern European countries as they did with those in Asia in the 1997 Asian financial crisis, Colton said the situations of the two regions should not be treated the same.

While the Asian financial crisis was caused by U.S. dollar shortages, the problem in southern Europe is fiscal crises, he said.

Later this month, a credit rating team from Fitch will visit Seoul for an annual consultation with the government on credit evaluations of the country and government.

turtle@donga.com