🚨 US Credit Rating Downgrade Impact: Burden on Korean Exports and Monetary Policy

Today Korean Economic News | 2025.05.24

📌 Moody's Downgrades US Credit Rating for First Time in 108 Years, Stagflation Concerns Spread with Q1 Negative Growth

💬 Moody's downgraded the US credit rating from the highest grade 'Aaa' to 'Aa1' for the first time in 108 years, sending shockwaves through global financial markets. With the US Q1 GDP growth rate recording -0.3%, marking the first negative growth in three years, the rapid increase in federal government debt and deepening fiscal deficit were cited as major reasons for the credit rating downgrade. This has led to growing concerns about stagflation (recession + inflation), and the Korean economy is also expected to face multi-dimensional burdens including export slump and possible delays in interest rate cuts.

1️⃣ Easy Understanding

Serious warning signs have been lit in the United States, the center of the world economy. The US 'credit rating' has fallen for the first time in 108 years, and the economic growth rate has also recorded negative numbers. This is a major event that will directly affect our country's economy.

First, let me explain what a 'credit rating' is in simple terms. Just as individuals have their credit scores checked when taking out bank loans, countries are also evaluated for 'how trustworthy they are' when borrowing money. The United States has maintained the highest rating of 'Aaa' as the world's safest country, but this time it has fallen to the next lower level of 'Aa1'.

The reason Moody's lowered the US credit rating is clear. It's because the US government has accumulated too much debt. Over the past 10 years, US federal government debt has increased rapidly due to persistent fiscal deficits, and interest burden has also grown significantly. Trump's tax cut policies combined with increased government spending have worsened fiscal health.

What's more serious is that the US economy is not growing. The Q1 2025 GDP growth rate recorded -0.3%, marking negative growth for the first time in three years. This is analyzed to be mainly caused by uncertainty from President Trump's tariff policies and companies' surge in imports.

The scary word 'stagflation' is also emerging. This is a phenomenon where the economy stagnates while prices rise, one of the worst economic situations the US experienced in the 1970s. Currently, the US has stopped economic growth but faces inflationary pressure from tariffs, raising such concerns.

What impact will this have on our country? First, direct hits to exports are expected. The US is Korea's second-largest export destination, and when the US economy struggles, demand for Korean products inevitably decreases. Second, monetary policy will also face constraints. If US interest rates remain high, the Bank of Korea will find it difficult to easily lower rates. Third, foreign investors may withdraw money from Korea, adversely affecting the stock market and exchange rates.

The current situation is not just overseas news, but an important signal of change that can directly affect our economy and daily life.

2️⃣ Economic Terms

📕 National Credit Rating

National credit rating is a grade that evaluates how capable a country is of repaying borrowed money.

• Evaluated by three major credit rating agencies: Moody's, S&P, and Fitch. Higher ratings are perceived as safer investments.
• The highest rating is 'Aaa' (Moody's) or 'AAA' (S&P, Fitch), and the US lost this rating for the first time in 108 years.
• When ratings fall, it leads to rising government bond yields and decreased investment attractiveness.

📕 Stagflation

Stagflation is a phenomenon where economic stagnation and inflation occur simultaneously.

• Normally, when the economy is bad, prices stabilize, but when both occur together, policy responses become very difficult.
• It occurred in the US in the 1970s due to oil shocks and was a phenomenon that greatly shocked the economics field.
• Currently, there are concerns about simultaneous price increases from tariffs and economic slowdown.

📕 Fiscal Deficit

Fiscal deficit means a state where government expenditure exceeds revenue.

• The US federal government fiscal deficit increased by 8% year-over-year to $1.8 trillion in 2024.
• Persistent deficits lead to increased national debt, becoming a major cause of credit rating downgrades.
• When tax cuts and increased government spending occur simultaneously, the deficit grows even larger.

📕 Negative Growth

Negative growth means the economic size shrinks compared to the previous period.

• A state where GDP growth rate records negative (-), interpreted as a signal of economic recession.
• The US Q1 -0.3% growth rate is the first negative growth since 2022, three years ago.
• If negative growth continues for two consecutive quarters, it's defined as a technical recession.

3️⃣ Principles and Economic Outlook

✅ Background and Ripple Effects of US Credit Rating Downgrade

• Let's analyze the historical significance and economic ripple effects of Moody's US credit rating downgrade.

  • First, the credit rating downgrade after 108 years shows structural problems in the US economy. Moody's has given the US the highest rating since 1917, but this time downgraded from 'Aaa' to 'Aa1' for the first time. This reflects structural fiscal deterioration, not just temporary problems. US federal government debt now exceeds 120% of GDP, with annual interest burden approaching $1 trillion. Moody's pointed out serious budget flexibility constraints, stating "the proportion of mandatory spending including interest costs in total fiscal spending will increase from 73% in 2024 to 78% in 2035." This means the US has significantly reduced room for fiscal policy responses during economic downturns or crises.

  • Second, while the impact of the credit rating downgrade on global financial markets is limited, it signals structural changes. The market somewhat anticipated this downgrade, so immediate shock was not significant. In fact, on May 19, the first trading day after the downgrade announcement, the New York stock market closed slightly higher. However, long-term concerns about declining confidence in US Treasury bonds and sustained upward pressure on interest rates are expected. Particularly noteworthy are changes in investment behavior by major US Treasury holders like China and Japan. China is already reducing its US Treasury holdings, and Japan is also cutting investments due to currency hedging cost burdens. This could act as long-term upward pressure on US Treasury yields.

  • Third, while there's no immediate threat to the dollar's reserve currency status, it could be the beginning of cracks. Moody's also evaluated in its report that "the status of the US dollar as the world's reserve currency provides substantial credit support to the country." Indeed, the dollar still accounts for over 60% of global foreign exchange reserves and is used as the basic currency for international trade settlements. However, movements challenging dollar hegemony could accelerate, including China's yuan internationalization, Europe's expansion of euro settlements, and even digital currency development. Particularly notable are BRICS countries' expansion of local currency settlements and central bank digital currency (CBDC) development.

• The US credit rating downgrade could signify a turning point in the global economic order. While the impact is limited short-term, it's likely to accelerate global financial system restructuring long-term.

✅ Q1 Negative Growth and Stagflation Risk

• Let's conduct an in-depth analysis of the causes of US Q1 negative growth and the possibility of stagflation.

  • First, the main cause of Q1 -0.3% growth rate is structural distortion due to tariff policies. Companies significantly increased imports before tariff imposition due to the Trump administration's tariff increase announcements. Q1 imports surged 41.3% while exports increased only 1.8%. Since import increases act as factors lowering growth rates in GDP calculations, this became the direct cause of negative growth. Consumer spending also decreased 0.5%, recording the lowest level since Q2 2023. This shows that uncertainty from tariffs and inflation concerns dampened consumer sentiment. Companies are also delaying investments, leading to sluggish capital investment.

  • Second, stagflation concerns are materializing due to tariff policy impacts on prices. President Trump imposed high tariffs of 145% on Chinese products, directly leading to rising consumer prices. The March Consumer Price Index (CPI) rose 3.4%, and if tariffs are fully applied, inflation is likely to accelerate further. The problem is stagflation phenomena appearing where prices rise while the economy slows. This is similar to patterns during the 1970s oil shock, where external shocks (oil prices then, tariffs now) raised supply costs, simultaneously worsening economic conditions and prices. The Federal Reserve faces policy dilemmas in such situations. It needs to raise rates for price stability but lower rates for economic stimulus.

  • Third, labor market and corporate performance deterioration are amplifying recession concerns. The consumer confidence index recorded 92.9 in March, the lowest since January 2021. This is the fourth consecutive monthly decline, showing consumers' rapidly deteriorating economic perceptions. Companies are also reducing hiring due to increased uncertainty, with some industries beginning restructuring. Manufacturing and retail sectors hit directly by tariffs are facing particular difficulties. If negative growth continues in Q2, the US would enter technical recession, severely shocking the global economy.

• US economic slowdown and stagflation risks represent new challenges different from the 2008 financial crisis. Since they stem from structural problems in the real economy rather than the financial system, solutions may be more difficult.

✅ Impact on Korean Economy and Response Measures

• Let's examine the specific impacts of US economic deterioration on Korea and response strategies.

  • First, export slump is the most direct impact factor on the Korean economy. The US is Korea's second-largest export destination, accounting for about 15% of total exports. US economic slowdown directly translates to reduced demand for Korean products. Particularly, major export items like semiconductors, automobiles, and chemicals are expected to be significantly affected. Semiconductor companies like Samsung Electronics and SK Hynix are already concerned about sales declines in the US market, and Hyundai Motor is also reviewing its US export strategy. The Korea International Trade Association analyzed that Korean exports decrease 0.6% when the US economy slows by 1%. If the US enters recession, Korea's annual exports could decrease by $3-5 billion. This would act as a factor pulling down Korea's GDP growth rate by 0.2-0.3 percentage points.

  • Second, monetary policy constraints will significantly reduce Korea's monetary policy flexibility. If US Treasury yields rise due to the US credit rating downgrade, Korea will also face difficulties in interest rate cuts. Deepening Korea-US interest rate inversion could lead to capital outflows and won weakness. With the current Bank of Korea base rate at 3.5%, lower than the US (5.25-5.5%), additional cuts would be limited. This means even if the Korean economy struggles, monetary policy stimulus effects would be difficult to expect. Indeed, the won/dollar exchange rate has been unstable, fluctuating around 1,380 won in May. If US rates rise further or high rates persist long-term, Korea's rate cuts will become even more difficult.

  • Third, financial market instability and foreign investment contraction are concerning. After the US credit rating downgrade announcement, KOSPI showed decline trends, with foreigners and institutions both selling. If global risk-averse sentiment spreads, 'decoupling' phenomena where funds withdraw from emerging markets like Korea could appear. This is similar to patterns during the 2008 financial crisis or 2011 US credit rating downgrade. With foreign stock investment ratio in Korea reaching 32%, sensitivity to foreign trends is inevitable. The government is working on exchange rate stabilization based on $410 billion in foreign exchange reserves, but there could be limits to defense if long-term capital outflows continue. Therefore, strengthening domestic demand base and expanding financial cooperation within Asia are needed.

• Korea must reduce US economic dependence and secure diversified growth engines. Short-term focus should be on export market diversification and domestic demand stimulation, while long-term efforts should build innovation-based self-reliant growth systems.

4️⃣ In Conclusion

The US credit rating downgrade and Q1 negative growth are not simple temporary phenomena but signals of global economic order change. The credit rating drop after 108 years means cracks are beginning to appear in the US-centered global economic system, and stagflation concerns raise the possibility of new forms of economic crisis.

Multi-dimensional burdens are expected to increase for the Korean economy. Given Korea's high export dependence, direct hits from US economic slowdown are inevitable. Particularly concerning are decreased exports to the US of major export items like semiconductors and automobiles, and the resulting contraction across related industries.

Monetary policy aspects are also likely to face dilemmas. While rates should be lowered for economic stimulus, considering capital outflows and exchange rate instability from US rate increases makes decisions difficult. This shows Korea's monetary policy autonomy is significantly constrained.

However, crisis is also opportunity. As US economic uncertainty grows, the importance of economic cooperation within Asia and discovering new growth engines becomes more prominent. Expanding trade with emerging markets like China, India, and ASEAN, and fostering future industries like digital, bio, and green technology could be the answer.

The government should focus short-term on supporting export companies and stabilizing financial markets, while long-term efforts should center on economic structure diversification and innovation capacity strengthening. Companies should also reduce US market dependence and invest in new market development and technological innovation.

Ultimately, this situation presents Korea with the historical task of moving away from externally dependent growth models toward building more self-reliant and diversified growth foundations. This is a time requiring wisdom and courage to turn crisis into opportunity.