The US Trump administration’s tariff policies could dampen the South Korean economy, but they are not expected to harm the country’s credit status in the short term, according to Fitch Ratings' sovereign analyst.

“One year or a couple of years of slow growth due to tariffs won’t impact Korea’s credit profile,” Fitch Ratings Asia Pacific Sovereign Rating Director Jeremy Zook said in an interview with The Korea Herald on Friday.

US President Donald Trump launched a global trade war by raising tariff rates shortly after taking office in January. His series of tariff actions raised concerns that the export-reliant Korean economy could be affected, particularly by a 25 percent tariff on all steel and aluminum imports into the US, effective March 12, and his plan to impose duties of 25 percent on automobiles, pharmaceuticals and semiconductors imported into the US starting April 2.

“I believe we would need to see a persistent negative impact on medium-term growth to assess Korea's ability to retain relatively dynamic global leadership in many industries,” Zook said. “The critical question is whether this undermines the longer-term economic outlook for Korea.”

In its latest yearly report on sovereign ratings released on Feb. 6, Fitch kept Korea’s sovereign credit rating unchanged at "AA-," the fourth highest on its scale, with a stable outlook. This rating has remained at the same level since September 2012.

Unlike other countries that faced credit downgrades following political turmoil, Korea’s turmoil has not yet severely impacted fiscal management, according to the Fitch analyst.

“Whereas in a situation like France or perhaps the US, the political gridlock translated into a situation where governments have been less able to address immediate fiscal challenges, in Korea, those fiscal challenges are not as immediate and we haven't seen it yet undermine fiscal management,” according to him.

Asia’s fourth-largest economy maintained fiscal buffers, with a government debt-to-GDP ratio around 48 percent, slightly below the 50 percent AA peer median, Zook said.

Fitch revised its 2025 GDP growth forecast for Korea down to 1.7 percent from 2.0 percent in the report, citing diminished confidence stemming from the ongoing political uncertainty surrounding President Yoon Suk Yeol's martial law declaration and impeachment trial.

Regarding Trump's plan for reciprocal tariffs on US trading partners, Zook indicated that Korea might have some buffer due to the renegotiation of the US-Korea Free Trade Agreement during Trump’s first administration. However, he cautioned that this does not “necessarily insulate Korea from potential tariffs, as seen with Canada and Mexico, which also renegotiated their FTAs during that time.”

Fitch’s latest rating is based on the assumption that Korea's presidential election will be held during the second quarter of this year, in the event that the Constitutional Court upholds Yoon’s impeachment by mid-June at the latest, according to him. Zook noted that a modest delay in this timeline would not affect Fitch's outlook on the rating.

“If the Supreme Court were to reverse the impeachment decision, it could lead to further gridlock over the next two years, extending to the 2027 presidential elections,” he said. “In such a scenario, if political gridlock contributes to more challenging fiscal fundamentals, that could prompt a negative rating action.”

For the medium-term outlook, Fitch will closely examine the Korean economy's ability to advance economic reforms that enhance productivity and potential growth to counterbalance the negative effects of the declining workforce. “That’s the biggest structural challenge,” the Hong Kong-based director of Asia ratings said.

Zook acknowledged the government’s initiatives to strengthen industrial competitiveness and attract more investors to its capital market. “Korea boasts many industry leaders in the semiconductor and electronics sectors, and competition in these areas is intensifying, especially from China,” he said.

“So being able to enact economic reforms that sustain Korea’s competitive advantages in these industries will likely influence the medium-term outlook.”

Prior to joining Fitch, Zook served as an economist at the US Department of the Treasury and was a research analyst at the International Monetary Fund.

By Park Han-na (hnpark@heraldcorp.com)