N. Korea Risk Poses Threat to S. Korean Economy open the window of AOD

Write : 2017-09-17


Amid rising tensions from North Korea's nuclear and missile threats, a sense of crisis is also looming on the South Korean economy.
The domestic economy's external soundness remains solid but the problem lies in the ever increasing so-called North Korea risk.
South Korea's economy has been pretty much immune to North-triggered risks. But some point out the situation is slightly different this time around, with the North's threat to attack the U.S. territory of Guam followed by its sixth nuclear test and recent missile launches over Japan.
The so-called North Korea risk had already been factored in when the regime threatened to attack Guam. The premium for South Korean credit default swaps(CDS) shot up to 70 basis points on August 14, shortly after the North issued its threat, up from 57 basis points in just one week.
A higher CDS premium deals a blow to the sovereign credit rating, which raises costs for issuing bonds.
The prevailing view is that even if foreign investments flow out of the country due to increased North Korea-related risks, the exodus will not reach the level of a systemic risk as seen in the late 1990s during the Asian financial crisis.
The Bank of Korea says foreign exchange reserves stood at around 385 billion dollars as of late last month, posting an all-time high for the 4th straight month. In comparison, South Korea had just 8.9 billion dollars in FOREX reserves in 1997 during the financial meltdown.
A current account surplus streak has also continued for the 65th consecutive month, helping to maintain the domestic economy's external soundness.
However, concerns linger over growing tensions on the Korean Peninsula and China's continued economic retaliation over South Korea's deployment of the U.S. THAAD antimissile system.
Bank of Korea governor Lee Ju-yeol expressed concern that effects from the North Korea risk could impact the real economy.
Some experts say if the risk factor continues, adverse effects are inevitable, such as the exit of foreign funds and depreciation of the Korean won.
But experts agree that a calm response while monitoring the developments is better than artificial market intervention. Others call for the need to increase currency swaps with other countries.

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