Geopolitical tensions weigh on economy

By Yoon Ja-young

Heightening geopolitical tension on the Korean Peninsula are casting a shadow over the already weak economy, and will make it harder for the government to achieve its growth target for this year, analysts said Friday.

They expressed concern that it could also hurt Korea’s sovereign credit rating and damage exports to China.

“As the government says, businesses in the Gaeseong Industrial Complex (GIC) make up a tiny part of Korea’s gross domestic product (GDP). However, if the current situation continues, there could be an additional exodus of foreign funds from Korea’s capital market,” said Park Sang-hyun, chief economist at Hi Investment and Securities.

Park said that escalating military tension could work negatively on the nation’s sovereign credit rating as well

The government has said that economic losses from the closure of the GIC will be negligible, as its annual $500 million output is only 0.04 percent of GDP.

However, Hong Soon-jick, a senior researcher at the Hyundai Research Institute, pointed out that the geopolitical issue comes at a time when the economy is already in trouble.

“Previously, issues such as North’s nuclear tests or the conflict between South and North Korea lasted only two or three days, or 10 days at the longest. But it is different this time,” he said.

He and other analysts said geopolitical risks will worsen consumer and investor sentiment. They said weaker stock prices and the swooning real estate market will add further downward pressure on consumer spending.

The issue is more complicatedly linked with the economy as it is likely to affect South Korea’s trade with its biggest trading partner, China.

The United States and Korea are to set up Lockheed Martin’s terminal high altitude area defense (THAAD) system on the peninsula to counter any provocative moves by North Korea, but China regards it as a threat. This has ignited concern that China could take retaliatory economic measures.

The government, however, appears undeterred, with Strategy and Finance Minister Yoo Il-ho saying that the economy will weather temporary geopolitical risks.

Prof. Kim Heung-kyu, who heads the China Policy Institute at Ajou University, said that economic retaliation by China will naturally follow THAAD deployment.

“It will not impose immediate restrictions or retaliate straight away, but there are diverse unofficial measures China can take. If it takes any of these, Korea would be in a troublesome situation.”

He cited travel as one such option. “Travel agencies in China are state-run. If it restricts travel to Korea, the number of tourists will nosedive.”

Kim also cited batteries made by Samsung and LG. Electric buses using Samsung and LG-manufactured batteries will not be given Chinese government subsidies.

“China can just slightly change the standard. For us, the tens of billions won investment will then be futile. If China continues taking such measures, it will be a serious blow to Korea.”

He pointed out that the government seems to be setting up strategies only from the narrow viewpoint of security.

Hong at Hyundai Research Institute also said China could raise non-tariff barriers.

“China is Korea’s biggest trading partner, taking 25 percent of Korea’s exports. It cannot avoid damage if China raises barriers in trade, such as customs procedures.”

He hopes that South and North Korea will resume dialogue when political events such as the general election in April are over.