South Korea Faces Credit and Fiscal Risks Despite Growth Momentum in 2026

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Summary:

South Korea's economy is expected to grow in 2026, supported by AI investment and eased U.S. tariffs, but credit rating and fiscal risks are emerging due to large-scale foreign investments and expansive fiscal policy....

Positive Outlook Masked by Emerging Vulnerabilities

According to a December 13 report by South Korea’s Newsis and supported by Fitch Ratings’ "Asia-Pacific Sovereign Outlook through 2026," the nation’s economic recovery remains on track thanks to increased capital flows into artificial intelligence infrastructure and progress in trade negotiations with the United States. However, behind this promising trajectory lie several structural and external vulnerabilities that could weigh heavily on South Korea’s fiscal health and sovereign credit rating.

The decision to increase investment in artificial intelligence infrastructure aligns with South Korea’s long-term industrial strategy and supports its transition into a more tech-driven economy. Alongside this, the recent conclusion of tariff negotiations with the United States is expected to reinforce trade dynamics. Fitch Ratings anticipates a notable boost in South Korea’s exports, particularly in the automotive sector, following the U.S. commitment to lower tariffs on Korean cars from 25% to 15%, a level now comparable to those imposed on Japanese and European products. This change creates a level playing field for Korean manufacturers and will likely improve export competitiveness.

Foreign Reserve Depletion: A Structural Credit Concern

However, the positive sentiment is tempered by concerns over South Korea’s massive pledge to invest $350 billion in the United States. Fitch warns that fulfilling this commitment may lead to a significant decline in foreign exchange reserves. As of November 2025, South Korea’s reserves stood at $430.7 billion, which is only about one-third of Japan’s reserves, currently at $1.347 trillion. This disproportion underscores South Korea’s relatively limited buffer against external shocks. If reserve levels fall too sharply during the course of these outbound investments, the country’s credit rating may be reevaluated, especially if market perception shifts toward increasing vulnerability to capital flight or currency volatility.

In this case, there is a potential causal relationship: the act of deploying reserves for international investment while beneficial for long-term strategic positioning can lead directly to reduced liquidity and perceived creditworthiness. Unlike mere correlation, this reflects a direct trade-off between growth ambition and reserve sustainability.

Fiscal Expansion and the Risk of Worsening Public Debt

Fitch also flags fiscal policy as a notable area of risk. South Korea, alongside economies like Indonesia, Thailand, and the Philippines, is currently pursuing expansionary public spending agendas. While these policies are aimed at post-pandemic recovery and strategic investment, they carry the consequence of weakening fiscal consolidation. The resulting rise in public debt could limit future policy flexibility and expose the economy to interest rate risk or international investor skepticism.

The Ministry of Economy and Finance’s recent report “Government and Public Sector Debt for Fiscal Year 2024” reveals that South Korea’s government debt is projected to reach 1,270.8 trillion won, approximately 49.7% of GDP. Although this figure is still manageable by global standards, its rapid increase is raising concerns. If interest rates rise or growth falters, debt servicing could constrain future budgets, especially in the absence of structural reforms or enhanced tax revenue.

Geopolitical Uncertainty and Broader APAC Risks

Beyond domestic considerations, South Korea’s macroeconomic stability in 2026 will also be shaped by regional and global developments. The Fitch report highlights several key external risks facing the broader Asia-Pacific region, including ongoing U.S. trade and tariff unpredictability, fiscal imbalances driven by excessive government spending, and geopolitical instability in areas such as the South China Sea. Additionally, the persistent tension between the U.S. and China could pressure South Korea to navigate increasingly polarized trade and diplomatic relations, potentially affecting export channels and strategic alliances.

In this context, the risks are largely correlational fiscal strain in other APAC economies or geopolitical instability may not directly cause downturns in Korea but could increase external pressure or investor caution that indirectly affects Korean assets and capital flows.

While South Korea enters 2026 with strong economic fundamentals, aided by AI investments and improved trade terms with the United States, the country’s financial resilience faces tests on multiple fronts. The anticipated depletion of foreign reserves due to overseas investments and the expansionary fiscal stance present tangible risks to credit stability and public debt sustainability. Unless mitigated by structural safeguards and careful policy management, these factors may constrain Korea’s ability to weather future shocks despite short-term optimism. Balancing growth ambitions with fiscal discipline and reserve integrity will be critical for maintaining investor confidence and macroeconomic stability in the years ahead.

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