SEOUL: South Korea’s credit default risk dropped to the lowest level in seven years and four months, data showed Monday, pointing to an improvement in the country’s economic fundamentals.
The credit default swap (CDS) premium for South Korean foreign exchange stabilization bonds with a five-year maturity reached 46.24 basis points as of May 15, the lowest level since 45 basis points on Dec. 31, 2007, before the country was hit by the global financial crisis, according to the data by market tracker Markit.
The spread reflects the cost of hedging credit risks on corporate or sovereign debt. A rise implies a deterioration in the credit of government bonds and higher costs for issuance. A basis point is 0.01 percentage point.
The credit default risk of Asia’s fourth-largest economy had stuttered earlier in the year on deflation concerns and uncertainties in the global financial market.
But the figure started to trend lower in tandem with stabilizing global oil prices and a continued current account surplus streak.
The country extended its surplus streak to a 37th straight month in April, poised to break the current record surplus streak of 38 months, which began in June 1986.
An outlook upgrade by Moody’s Investor Service was another positive factor. Last month, the credit appraiser raised its credit outlook on the country to “positive” from “stable,” citing the government’s improved public debt management.
“The recent fall in Korea’s CDS premium seems to stem from a widening current account surplus and inflow of foreign funds. It reflects the country’s sturdy external soundness,” said a central bank official.
