On economic front, no ill effects expected

By Kim Tae-gyu

A majority of Seoul analysts predict that the sudden death of Kim Jong-il, the second-generation North Korean dictator, will not have a large negative effect on the South Korean economy.

After Pyongyang announced Kim’s demise Monday, The Korea Times asked a total of 10 local market observers about its potential economic influence both in the short and long terms.

Five of them said that its influence would be neutral and three labeled it as negative; one came up with a positive view while the remaining one had no comment.

``This should be a big shock and financial markets will have to brace for some jitters in the short run. But its impact on the real economy is likely to be limited,’’ said Prof. Lee Phil-sang at Korea University.

``But there exist some concerns that investors and consumers will become more reluctant to spend money.’’

Chairman Yoo Jang-hee of POSCO’s board of directors concurred.

``Basically, this is a political issue and not an economic one. If the Northern political system remains stable, the effect of Kim’s death will not be that big,’’ said Yoo who taught economics at Ewha Womans University.

Solomon Investment & Securities chief researcher Lee Jong-woo argued that movements in the Seoul bourse amply demonstrate how much the market will be affected.

The benchmark KOSPI fluctuated in the vicinity of 1,800 points in the morning before plummeting by almost 3 percent to threaten to dip below the 1,750 mark after Kim’s death was disclosed at noon.

However, share prices showed resilience as it recovered around half of the loss to finish at 1,776.93.

``We have gone through a host of political crises with regard to North Korea to learn that the effects of political issues do not last long no matter how big they are,’’ Lee said.

``In Monday’s share markets, investors immediately changed their position from selling to buying.’’

Prof. Jun Sung-in at Hong Ik University even presented a positive view that the new Northern leadership, possibly headed by late Kim's son Jung-un, may result in better economic cooperation between the two countries.

``The South-North relationship has been stuck in a stalemate over the past few years. The new regime in the North might offer a breakthrough with the leadership in the South which is set to change in early 2013,’’ Jun said.

``Once the two countries manage to build up a better relationship as compared to the present, it will have a good influence on the South Korean economy, weakening the Korea discount.’’

The Korea discount refers to the depreciation of the Seoul bourse compared to its fundamentals, which watchers point out is generated by political risks associated with North Korea and the South’s unfriendly attitude toward overseas capital.

Worst-case scenario

However, there is by no means a lack of negative views. In particular, some raised the worst-case scenario under which Seoul might be hit hard by political risks if Pyongyang’s new leadership falters.

``Basically, I expect the North will not have a big effect on South Korea’s economy although we may face some short-term instability,’’ Citigroup Global Market Securities CEO Park Jang-ho said.

``But the worst-case scenario is something like the collapse of the North Korean regime. We don’t even want to think about that.’’

Prof. Ham Joon-ho at Yonsei University also worried about uncertainties.

``First of all, the death of Kim Jong-il has greatly increased uncertainties in our economy. As you are aware, any economy’s primary enemy is uncertainty,’’ Ham said.

``We cannot be certain how smoothly Pyeongyang will be able to establish authority in the post Kim Jong-il era. That is a big uncertainty on which we should keep an eye.’’

Prof. Kim Tae-dong at Sungkyunkwan University said that the Seoul government is required to keep a tab on movements of offshore investors here.

``Over the long haul, foreign investors might shun the Korean market due to a higher political risk caused by the North. I think that we need to be prepared for such a possibility,’’ said Kim who served as a presidential economic advisor during the former Kim Dae-jung administration.