Singapore, April 14, 2010 -- Moody's Investors Service has changed South Korea's government bond ratings to A1 from A2 and maintains a stable outlook. "The change has been prompted by Korea's demonstration of an exceptional level of economic resilience to the global crisis, while containing the government's budget deficit," says Tom Byrne, a Moody's Senior Vice President. The Korean economy is responding rapidly to the improving global economic environment, and the government has put in place supportive policy measures which should help sustain economic growth over time. Moody's rating action also includes moving the ceiling applied to foreign currency bonds issued in Korea to Aa2 from Aa3, and moving the ceiling applied to foreign currency bank-deposits to A1 from A2. The local-currency bond and bank deposit ceilings remain at Aa1. "The resiliency of Korea's economy was evident in its ability to withstand relatively well the contractionary forces which emanated from the global recession," says Byrne. "Its highly open economy eked out a positive 0.2 percent gain in 2009, and is likely to stage a robust recovery with a 5 percent-growth rate in 2010, even as fiscal stimulus measures are wound down." The eventual exit from a very accommodative monetary policy may, however, temper growth momentum in the next 1-2 years. Furthermore, the global financial crisis has not resulted in a large increase in central government debt, which remains at a moderate level, while the fiscal deficit in 2009 was relatively small. "Such achievements place Korea in a favorable position when compared with most other A-rated countries." As such, Moody's sees a strong likelihood that the government will succeed in its medium-term fiscal strategy of eliminating its deficit in the next 2-3 years. At the same time, the vulnerabilities exposed during the height of the global financial crisis - namely, the banking system's partial reliance on off-shore funding - are being addressed and reduced. Regulatory measures have recently been introduced to reduce other risks arising from the banks' relatively high loan-to-deposit ratios over a multi-year period. Nonetheless, the overall soundness of the banking sector's domestic operations will facilitate the economic recovery and help to anchor future economic prospects. External vulnerabilities have been further reduced by the broad scope of the recovery. Rebounding from the deleveraging and credit market shocks of 2008, official foreign exchange reserves have risen to a historical high of $270 billion, and the current account is likely to remain in surplus this year. However, Moody's notes that demographic challenges will arise in the next 10-15 years. In the meantime, assets in the National Pension system -- already at a sizable level of around one-fourth of GDP-- will continue to grow robustly over that time horizon and perhaps even beyond. Rating concerns center on two factors, one of which is the rise in broader public-sector debt, mostly of state-owned corporations, in recent years. Although this development has not yet imposed a burden on the central government's balance sheet -- owing to the maintenance of a positive net-income position even at the depth of the downturn -- public-sector finances warrant scrutiny in the context of plausible future and unforeseen adverse scenarios. The other and more salient concern is the level of event risk posed by North Korea, which could undermine the South's strong core credit fundamentals. The Six-Party negotiations which aim to rid the North of its nuclear weapons program remains deadlocked. And the possibilities of military provocations which threaten regional peace are always present. These concerns are counterbalanced by Korea's robust alliance with the United States and shared interests among regional powers for stability on the peninsula. Such a constellation of forces will be crucial in restraining North Korean provocative behavior. China is also likely to play an increasingly important role in ensuring stability on the peninsula,given its close ties with Pyongyang and its strategic regional interests. Moreover, in the event of a positive transformation of the regime in Pyongyang, the future fiscal cost of engagement or stabilization of the North would be manageable and consistent with the Republic of Korea's ratings. That said, the scenario of a catastrophic collapse of the North cannot be totally dismissed, although this is the nature of event risk that by definition is very difficult to predict with much foresight and to quantify precisely. For Korea's ratings to move up further, Moody's would look for continued robust economic performance, continued improvement in institutional strengths and greater containment of, if not a reduction in, geopolitical event risk. Moody's previous rating action on Korea was on September 7, 2009 whent the local currency bond ceiling was realigned to Aa1 from Aaa. The principal methodology that Moody's uses in rating the Republic of Korea is its Sovereign Bond Ratings Methodology published in September 2008 and available on www.moodys.com in the Rating Methodologies subdirectory under the Research & Ratings tab.