Moody's raises South Korea growth forecast to 3.5% on semiconductor boom

International credit rating agency Moody's has significantly upgraded its economic growth forecast for South Korea, projecting a 3.5% expansion for the current year. This marks a substantial increase from its earlier estimates of 1.8% in February and 2.5% in May, reflecting a more optimistic outlook for the nation's economy.

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The demand for semiconductor chips continues, and there are limited companies that can realistically replace South Korea's high-performance memory suppliers.

The primary driver behind this upward revision is the ongoing semiconductor super-cycle, which Moody's anticipates will persist until at least mid-2025. This boom is fueling a robust export performance, with South Korean exports surging 50.5% in the first seven months of the year compared to the same period in 2023. Semiconductor exports, in particular, have shown remarkable strength, exceeding $90 billion for two consecutive months and setting new records.

Moody's highlighted the limited global alternatives to South Korea's high-performance memory chip suppliers, suggesting a sustained demand for these critical components. The agency also positively assessed the South Korean government's "consistent policy efforts" to foster advanced industries like semiconductors and artificial intelligence, noting that successful mega-projects could enhance the nation's productivity and potential growth rate.

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consistent policy efforts to keep pace with technological innovation

Furthermore, Moody's expects South Korea's fiscal health to improve, projecting a deficit-to-GDP ratio of 3.8%, better than the target. However, the agency cautioned that without further policy reforms, long-term fiscal sustainability could be challenged by an aging population, increased defense spending, and investments needed to maintain export competitiveness.

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additional policy reforms are needed to address the significant burden on finances from an aging population, defense and security-related expenditures, and investment costs to maintain export competitiveness.