Ratings Companies: North Korea Impact on South Korean Economy Limited

February 18, 2016South Koreaby EW News Desk Team

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Ratings firms believe North Korea’s missile launch and nuclear testing will have a minor impact on South Korea’s economic output. Ratings agencies will not adjust South Korea’s credit rating in wake of the North Korean incident, believing that the economy will remain in stable condition.

However, the South Korean won is the worst performing currency in Asia so far in 2016, and investors are looking for future rate cuts from the nation’s central bank.

The conflict between North and South is reaching an all-time high, but the economic impact has been minimal. President Park Geun-hye shut down a joint-owned factory park in North Korea and she has vowed to respond with further action. The president also suggested that North Korea’s economy could collapse if leaders fail to change course on their missile program.

Geopolitical Standoff

While the president is sending a stern signal to the North by shutting down the park, critics from the South Korean liberal party believe that such a move hurts the business community. Analysts note that shutting down the factory takes away South Korea's leverage, but the South retains more economic and political clout than the North.

South Korea has sent over $3 billion in aid since the 1990s, with a variety of South Korean goods smuggled into North Korea to feed the populace’s growing consumer appetite. With that, North Korea is not solely reliant on its southern neighbor, depending on China and Russia for primary support. South Korea may be in a better position than North Korea, but the impact of the world economy and other domestic matters are taking a toll on the economy.

Economic Woes

The currency’s poor showing on the world market partly derives from many investors pulling out stocks and bonds in response to the world economic downturn, and the Chinese slowdown. Experts fear that South Korea's economy will lose more money, especially after the Fed’s recent rate hike. Other factors could hamper growth, including high household debt, an aging population and an outdated job market that makes it harder for young people to advance in their fields.

Information and communications technology (ICT) exports fell over 17.8 percent from a year before, which is highly problematic for a country that relies heavily on the technology sector for sustained growth. The fall in exports stems from greater demand for Chinese goods, and South Korea was hit hard from an oversaturated smartphone market.

South Korean exports suffered a 20.2-percent decline in the European Union, followed by a 29.6-percent dip in the Middle East. Overall, South Korean exports dropped 18.8 percent year-on-year. A rough blow for a country whose exports comprise half of the nation’s GDP.

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