Nuclear test to have limited effect on economy

By Yoon Ja-young

North Korea’s nuclear test is expected to have a limited effect on the Korean economy, according to government officials and analysts Wednesday.

“After the report of an earthquake detected in North Korea, volatility increased slightly in the financial markets but they soon recovered. They remain stable despite the confirmation (of the nuclear test) by North Korea’s state TV,” said Financial Services Commission Chairman Yim Jong-ryong at the emergency meeting.

A South Korean weather agency reported early in the morning that it detected signs of an artificial earthquake near North Korea’s nuclear test site. It was confirmed by the North’s state broadcaster, the Korean Central News Agency, which announced that the regime successfully conducted a test of a hydrogen bomb.

The Seoul bourse reacted to the news of the earthquake detection, losing 0.98 percent to stand at 1911.61. The Kosdaq also fell 1.26 percent. However, the effect was short-lived. The KOSPI closed at 1,925.43 points, losing 0.26 percent and the Kosdaq closed at 687.27, up 0.47 percent from the previous day. The won/dollar rate closed at 1,197.9 won, up 9.9 won from the previous day, but analysts said it was due to the devaluation of yuan rather than the concern over North Korea’s nuclear test.

Analysts point out that investors now know empirically that North Korea’s explosion had little influence on the stock market or the economy.

“Due to past experience, the effects of a crisis caused by North Korea last for only a day on the market,” said Yoon Young-kyo, an economist at LIG Investment and Securities. He cited the missile launch, the Yeonpyeong Naval Battles between the two Koreas, the death of North Korean leader Kim Jong-il, and the three nuclear tests as North Korean crises the national has witnessed since the 1990s.

“In the cases of the first Yeonpyeong battle and the first and the third nuclear tests, stock markets fell noticeably on the first day of the events. However, there has always been a rebound within a few days. For the rest of the events, the drops didn’t last even a single day.”

Back in December 2011, the news of Kim Jong-il’s death pulled down the KOSPI by 3.43 percent. However, it recovered after two days. It also fell 2.41 percent when North Korea conducted its first nuclear test in 2006 October, but recovered in five days. The KOSPI dipped 2.21 percent following the Yeonpyeong battle in 1999 June but it recovered the next day. The KOSPI fell a mere 0.2 percent on the second nuclear test in May 2009, and 0.26 percent in the third test in February 2013.

“Due to repetition, North Korea’s crises are losing their influence as negative factors. The nuclear test this time will also have only limited effects on the stock market,” Yoon said. He added that investors should focus instead on the decisions to be made at the European Central Bank and the U.S. Fed or the expansion of China risk in financial markets rather than on North Korea.

Kyobo Securities also said in a report that it won’t accelerate changes in the fundamental.

“As investor sentiment isn’t good these days, there may be a tendency to exaggerate short-term negative factors,” it noted. “The short-term fall following the negative sentiment in the market should be regarded as a chance to buy shares at cheaper prices.”

The government also noted that market hasn’t been in good shape.

“The market has been reacting sensitively to even small news, due to the collapse of the Chinese stock market and the bad news from the Middle East. If the uncertainties continue, including the possibility of an additional nuclear test, the volatility may expand in the financial markets and in the overall economy for the short-term,” the finance ministry said in a media release after an emergency meeting.

It added that a joint task force will be monitoring the market to reassure investor confidence.