Credit rating agency Fitch noted the rising short-term external debt held by Korean banks in recent months, but said its portion relative to overall external debt was still sustainable.

“The South Korean government has been trying to reduce the industry’s short-term external debt but the level is back on the rise,” Andrew Colquhoun, Fitch’s head of Asia Pacific sovereign ratings, said in an interview with The Korea Herald in Seoul.

The British analyst said short-term external debt is a risk factor that weakened the economy’s credit profile in the past.

“But the portion, around 40 percent of total external debt in the industry, still is above the pre-crisis level of 2006 but it seems sustainable,” Chang Hea-kyu, director of the agency’s Korea desk overseeing financial institutions added on the sidelines of the agency’s annual Global Banking Conference in Seoul.

The Bank of Korea said the figure in the first quarter rose to $146.7 billion, up $11.7 billion from the previous quarter, the highest increase in two years.

The Hong Kong-based analyst said South’s fast accumulation of foreign exchange reserves can potentially be looked at as a “favorable” policy protecting the economy.

“But rise of the reserves also could reflect Seoul’s holding of currency down which contributes to inflation,” he added.

Colquhoun, meanwhile, advised South Korea to prepare for unification costs, underscoring the volatilities associated with North Korea as a major risk.

“Korea does lack in provision of contingent liability for reunification. We could say that collapse of the Northern regime would be contingent liability for South Korea,”

Colquhoun said making provisions now will be a prudent step as supporting the North through the transition process would incur potentially huge costs for Asia’s fourth largest economy.

“And the South Korean government is relatively well placed to make such provision because its public finances are very strong particularly among the Organization for Economic Cooperation and Development,”

The agency has maintained its fifth-highest “A+” sovereign credit rating with “stable” credit outlook for South Korea since Nov. 10.

Competing rating agencies such as Moody’s and Standard & Poor’s also retain their fifth-highest ratings, “A1,” for South Korea.

The comments from Fitch came as the country continues to debate the unification tax.

The volatilities of inter-Korea relations and the huge economic gap between the Koreas have been major factors weighing down on South’s sovereign credit rating. The gap differs depending on which calculation methods are used but the per capita gross domestic product here is between 15 to 40 times higher than that of North Korea. Mindful of such vastly different income levels, President Lee Myung-bak last year proposed the introduction of a unification tax, but the idea failed to make progress.

The Finance Ministry, overseeing the matter, said collecting a unification tax wasn’t likely to come anytime soon because “it hasn’t gathered enough consensus from the public.”

“As of now, improving public finance is our priority,” a ministry official added.

The Institute for National Security Strategy in February estimated the unification cost at $2.14 trillion, double the South’s GDP. The state-run think tank explained the unification costs would include expenses required to stem the outflow of weapons of mass destruction, maintain social order, and offer emergency relief goods to the North.

By Cynthia J. Kim (cynthiak@heraldcorp.com)