By Kim Jae-kyoung
SINGAPORE — North Korea is seeking to improve its competitive edge in negotiations with the U.S. and other countries through continuous military provocations, according to a senior analyst of S&P Global Ratings.
“The nuclear tests being pursued by North Korea are actions to strengthen their bargaining power with other countries,” Kim Eng Tan, senior director of Sovereign and International Public Finance Ratings, Asia-Pacific, at S&P Global Ratings, in a recent interview.
“There is little advantage for North Korea to trigger a military conflict that has the potential to bring down the current regime.”
Tan does not rule out the possibility of a war on the Korean Peninsula but said that the likelihood is very low.
“We see little likelihood of a military confrontation in the near term. Still, we cannot rule out such events happening due to miscalculations by key players,” he said.
He added that the biggest downside risk to the Korean economy is a slowdown of the global economy and sudden capital flight.
“We continue to see global developments as the key risks to Korea’s economic performance,” he said. “An abrupt change in investors’ attitude to risk that causes a rapid deterioration of financing conditions is one.”
“Another is a sudden drop in Chinese economic growth as a result of a sharp deterioration in sentiments.”
However, he said that recent unfavorable developments surrounding Korea, including Pyongyang’s provocations, won’t change its view on Korea’s credit ratings.
“The improvement in the external financing conditions of banks and the relatively steady performance of the economy has helped to bolster support for the sovereign ratings,” he said.
“The relatively smooth leadership change in North Korea also reduces an important event risk to the sovereign ratings,” he added. “These developments contributed to our decision to raise the sovereign ratings on Korea in the past two years.”
The credit rating analyst remains upbeat on the future of Asia’s fourth-largest economy. He dismissed rising concerns that Korea may face another economic crisis.
“Global economic uncertainty is a factor that affects all major economies. Korea feels the negative impact keenly because of its close ties to other markets,” he said.
“Nevertheless, its economy has been performing relatively well compared to other high income countries,” he added.
He explains that in part, it’s because of the sound financial sector and the government’s strong balance sheet.
“This has helped to underpin growth in domestic demand despite weaker export growth,” he said. “The health of the public and financial sector balance sheets, especially the low reliance on external financing, also cushions the economy against potential shocks.”
“Therefore, we see little likelihood of the Korean economy suffering from another crisis in the near future.”
In August, S&P raised its long-term sovereign credit rating for South Korea to a record high of “AA” from “AA-,” citing the country’s strong record of steady growth, greater fiscal and monetary flexibility and continual improvements in external metrics.
“Although Korea’s GDP growth in the next three to five years will be slower than its growth before the 2008 global financial crisis, we believe its prospects are superior to those of most developed economies,” it said.
“The reduction of short-term external bank debt and persistently large trade balances strengthened Korea’s external metrics, which also enhance the sovereign credit quality.”