Korea's Robust Economy Trumps North Korean Attacks, Says Moody's

Moody’s Investors Service will retain South Korea’s A1 sovereign rating and stable outlook, upgraded from A2 only in April this year, despite North Korea’s artillery barrage of the south’s Yeonpyeong Island last week. “Geopolitical tensions on the Korean Peninsula are factored into South Korea’s sovereign rating, and we consider the robust South Korean-US military alliance will deter a second Korean War,” the credit ratings agency said in a research report dated November 29.

“China’s interest in stability on the peninsula should also deter Pyongyang from launching more attacks that could lead to a war that would likely have profound consequences in East Asia,” Moody’s added.
However, it noted that official statements from China on the Yoeonpyeong attack and the sinking of a South Korean navy ship in March, which has been blamed on North Korea, have been “ambiguous.” The possibility cannot be dismissed that China is “either unable, or unwilling, to rein in its economically dependent patron state,” which can lead to the situation spiraling out of control, Moody’s said.
Still, the credit ratings agency regards South Korea’s “robust and resilient economy” as supportive of its rating and outlook. “Official foreign reserves today total a record high $293 billion, nearly $100 billion more than during the most turbulent times of the global financial crisis in late 2008,” it noted. “In addition, short-term debt is several billion dollars lower now than immediately following the collapse of Lehman Brothers. This alone provides the South Korean government a substantial buffer to financial shocks.”
Moody’s also pointed out that market gyrations from provocations by North Korea over the past decade had all been only fleeting. “In fact, the KOSPI stock market index is up more than 10% since the March sinking of the military ship, and the level of official foreign reserves has risen more than $20 billion since the beginning of the year,” said Moody’s.
Not that the credit ratings agency is totally unworried. “We are determining whether North Korea’s most recent provocation marks a fundamentally more reckless stance,” it said. “These provocations, which could threaten peace and stability on the Korean peninsula, underscore what we perceive as a heightened degree of uncertainty from North Korea as it undergoes a dynastic transition in leadership from the second to third generation. The leadership appears to be seeking to demonstrate its military mettle and divert attention from its domestic economic distress.”
“Moreover, North Korea’s longstanding refusal to abide by a nuclear non-proliferation policy, along with its newfound, self-proclaimed status as a nuclear power, may mark a dangerous ratcheting up of geopolitical tensions and event risk. At the very least, the latter may embolden the North Korean regime to push its brinkmanship to new heights as it seeks to assert territorial claims inside the Yellow Sea Northern Limitation Line, which is the sea extension of the Military Demarcation Line agreed to in the 1953 Armistice.”

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