The pressure is up for the new Korean president

Park Geun Hye’s stance on “economic democracy” likely to be tested.

According to Moody’s report, Korea’s new president will inherit an economy whose fundamentals have improved materially since the global financial crisis, but which is facing global headwinds. They expect overall continuity in economic policies when Ms. Park Geun Hye becomes president in February 2013, the sixth since democracy was firmly established in 1988.

Here’s more from Moody:

Korea’s Aa3 local and foreign government bond ratings are supported by very high degrees of economic and government financial strengths. The Sovereign Bond methodology’s three-notch indicative rating range for Korea is Aa1-Aa3. The rating outlook is stable.

We upgraded Korea’s rating to Aa3 from A1 on 24 August 2012 because of: (1) its strong fiscal fundamentals, (2) its economic resilience and competitiveness, (3) the reduced external vulnerability of the banking sector, and (4) the status-quo in North-South geopolitics.

President-elect Park’s stance on ‘economic democracy’ is likely to be measured, and will not undermine Korea’s strong fiscal fundamentals which provide a significant leeway in policy to cope with shocks. The government’s balance sheet was unscathed by the 2008 global financial crisis. Debt is at a moderate level and gross financing requirements are very low.

Public corporation debt has, however, increased substantially in the past several years. The government’s newly introduced medium-term management plan will therefore need to ensure that contingent risks to the government’s balance sheet remain very low.

While Korea’s economic growth rate this year has slowed along with the downturn in global growth, the competitiveness of its export sector will help lead a rebound as the global economy recovers. But, high and rising household debt could crimp domestic demand and undermine the economy’s potential annual growth rate of 4%.

On the other hand, macro-prudential regulatory measures and improved risk management have reduced the banking sector’s external vulnerabilities, while $326 billion of official foreign reserves provide a substantial amount of self-insurance.

Meanwhile, a sterile status quo prevails in inter-Korean relations with Pyongyang’s dynastic transition. Although Pyongyang’s successful ballistic missile launch aggravates regional tensions, it is consistent with our ‘moderate’ assessment of geopolitical event risk.

North Korean policy was a prominent election issue, with both candidates favoring a softer approach. However, efforts by Seoul’s new administration to engage constructively the North will likely prove as difficult now as it has in the past. Pyongyang remains intransigent and its rigid militaristic ideology rules out fundamental economic reform.