By Kim Jae-kyoung
SINGAPORE ― Global investors' growing awareness of geopolitical risks on the Korean Peninsula may cut foreign direct investment and spark a capital outflow from the country, according to Moody's Investors Service.
"Merely the perception of geopolitical risks can hurt a country's capital, current and fiscal accounts, making it harder for it to service its debt," said Steffen Dyck, a senior analyst from Moody's.
"It can lead to lower foreign direct investment and higher funding costs for the public and private sectors," he added. "We have seen increased foreign investor awareness in previous episodes of heightened geopolitical tensions."
His remarks suggest that the Seoul government should pay greater attention to coping with foreign investors' concerns about such risks which, if not dealt with properly, could deal a blow to the domestic financial market.
Still, he is positive about the country's capability to weather the geopolitical risks.
"While geopolitics poses a salient risk for South Korea, we expect Seoul's robust alliance with the U.S. and China's influence to contain the risk of direct conflict between South and North," he said.
He pointed out that regional geopolitical risk in relation to the South-North situation was a key factor for the South's sovereign rating, currently Aa2 with a "stable outlook."
Dyck is vice president of the agency's sovereign risk group that evaluates Korea's sovereign rating.
Despite the growing geopolitical risk that Pyongyang's recent provocations have caused, he said the agency had no immediate plans to modify its credit rating for South Korea, citing the country's strong economic fundamentals.
"Closing the Gaeseong Industrial Complex could be seen as credit-negative," he said. "However, at this point we do not think that there is any material difference to previous events."
He explained that Korea's sturdy economic fundamentals have made it resilient to deal with episodes of heightened tension.
"The country has a strong external position, supported by competitive export industries and large holdings of official foreign exchange reserves," he said.
He pointed out that the country's current account had been in surplus every year since the Asian financial crisis, and reached a 16-year high of 6.3 percent of GDP in 2014.
"These large and recurrent buffers will bolster the resilience of the government, banking and corporate sectors against any volatility in capital flows," he said.
S&P maintains ‘stable outlook'
Standard & Poor's (S&P), another global credit ratings agency, expects that the latest provocations will have only a limited impact on Seoul's financial markets, indicating that the agency also had no plans to modify its ratings.
"Our outlook on the sovereign ratings of South Korea remains stable. The geopolitical risks on the Korean peninsula are already factored into our ratings," said S&P's Singapore-based analyst Yee Farn Phua.
"Recent events like the nuclear test and long-range rocket launch by North Korea can have a temporary impact on financial markets and economic activities. But we observe that they have not escalated beyond levels that we assess as part of the factors supporting South Korean sovereign ratings."
On Friday, Korea's financial markets took another heavy beating, with the benchmark KOSPI dipping 1.41 percent. The tech-laced KOSDAQ plunged 6 percent on the same day, resulting in activation of a "circuit breaker" for the first time in more than four-and-a-half years.
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| Steffen Dyck |
"Merely the perception of geopolitical risks can hurt a country's capital, current and fiscal accounts, making it harder for it to service its debt," said Steffen Dyck, a senior analyst from Moody's.
"It can lead to lower foreign direct investment and higher funding costs for the public and private sectors," he added. "We have seen increased foreign investor awareness in previous episodes of heightened geopolitical tensions."
His remarks suggest that the Seoul government should pay greater attention to coping with foreign investors' concerns about such risks which, if not dealt with properly, could deal a blow to the domestic financial market.
Still, he is positive about the country's capability to weather the geopolitical risks.
"While geopolitics poses a salient risk for South Korea, we expect Seoul's robust alliance with the U.S. and China's influence to contain the risk of direct conflict between South and North," he said.
He pointed out that regional geopolitical risk in relation to the South-North situation was a key factor for the South's sovereign rating, currently Aa2 with a "stable outlook."
Dyck is vice president of the agency's sovereign risk group that evaluates Korea's sovereign rating.
Despite the growing geopolitical risk that Pyongyang's recent provocations have caused, he said the agency had no immediate plans to modify its credit rating for South Korea, citing the country's strong economic fundamentals.
"Closing the Gaeseong Industrial Complex could be seen as credit-negative," he said. "However, at this point we do not think that there is any material difference to previous events."
He explained that Korea's sturdy economic fundamentals have made it resilient to deal with episodes of heightened tension.
"The country has a strong external position, supported by competitive export industries and large holdings of official foreign exchange reserves," he said.
He pointed out that the country's current account had been in surplus every year since the Asian financial crisis, and reached a 16-year high of 6.3 percent of GDP in 2014.
"These large and recurrent buffers will bolster the resilience of the government, banking and corporate sectors against any volatility in capital flows," he said.
S&P maintains ‘stable outlook'
Standard & Poor's (S&P), another global credit ratings agency, expects that the latest provocations will have only a limited impact on Seoul's financial markets, indicating that the agency also had no plans to modify its ratings.
"Our outlook on the sovereign ratings of South Korea remains stable. The geopolitical risks on the Korean peninsula are already factored into our ratings," said S&P's Singapore-based analyst Yee Farn Phua.
"Recent events like the nuclear test and long-range rocket launch by North Korea can have a temporary impact on financial markets and economic activities. But we observe that they have not escalated beyond levels that we assess as part of the factors supporting South Korean sovereign ratings."
On Friday, Korea's financial markets took another heavy beating, with the benchmark KOSPI dipping 1.41 percent. The tech-laced KOSDAQ plunged 6 percent on the same day, resulting in activation of a "circuit breaker" for the first time in more than four-and-a-half years.
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