By Kim Yoo-chul
The Panmunjom Declaration is good for the credit rating of Korea, however, it hasn't eliminated the risks of a military standoff on the peninsula, two major credit ratings agencies said, Monday.
"If peace is sustained, a smooth rapprochement between the Koreas would lower the geopolitical risks and be good for the credit rating of South Korea," Christian de Guzman, vice president and senior credit officer at Moody's Investors Service, said.
The agency said the declaration was a prelude to more substantive negotiations to diffuse the geopolitical tension generated in late 2017.
Last week, President Moon Jae-in and North Korea leader Kim Jong Un had a historic summit in Panmunjeom where the armistice agreement that suspended hostilities of the Korean War was signed 65 years ago. The two signed an agreement to seek an end to the Korean War, establish permanent and solid peace, and denuclearize the Korean Peninsula.
Guzman said the agency assessed geopolitical risk for South Korea last year, as "Moderate (+)" to incorporate an increased probability of military conflict on the peninsula and the increasingly strident rhetoric between North Korea and the United States.
"Our assessment of geopolitical risk reflects a low-probability, high-impact conflagration that would negatively affect South Korea's economy, the functioning of its government and the country's payment system," he said.
Moody's has been paying attention to the steps taken by the two Koreas to de-escalate tension.
Since last year, Pyongyang has diplomatically re-engaged with Seoul; participated in February's Winter Olympic Games in PyeongChang; announced an immediate suspension of nuclear and missile tests and the decommissioning of a nuclear test site; leading to last week's summit and the Panmunjom Declaration.
But Fitch Ratings remained neutral on how developments at the summit will change South Korea's sovereign ratings.
"The summit between the two Koreas eases tension on the peninsula, but doesn't eliminate risks associated with the military standoff," said Fitch Ratings Director Thomas Rookmaaker.
"The long-term standoff results in geopolitical risks to South Korea's sovereign balance sheet. These relate not only to the potential for conflict, but also to the possibility of reunification costs arising long term. Our AA-/Stable sovereign rating of South Korea is one notch lower than that implied by our rating model largely to take these risks into account," said the agency.
According to its observation, it's still unclear whether the summit signals the start of a permanent, structural easing of geopolitical tension on the peninsula, which has tended to rise and fall in cycles.
"The outcome of diplomatic activity in the coming months is difficult to predict, and tensions could re-escalate quickly if the United States feels that summit diplomacy is not achieving its aim of denuclearization," said the director.
Notwithstanding the shared commitment by both South and North Korea to advance the peace process, the path toward a definitive and permanent resolution of inter-Korean tension is fraught with uncertainties and complexities involving other stakeholders, primarily the United States and China.
North Korea will have a summit with the U.S. in late May or early June.
Regarding the issue about the possible outcome of the summit between the North and the United States, Guzman said; "The outcome of the proposed bilateral summit between the U.S. and North Korea will set the tone for the implementation of the common goals set out in the Panmunjom Declaration."
"In the context of recent gains in North Korea's nuclear capabilities, the specific conditions needed to compel North Korea to give up its nuclear arsenal remain unclear. Moreover, the pledge to carry out disarmament by both Koreas seems unlikely, at least in full, in the absence of more significant trust-building measures," Guzman said, adding the degree to which the U.S. and its allies would accommodate a reduced military presence in South Korea was unclear.
The Panmunjom Declaration is good for the credit rating of Korea, however, it hasn't eliminated the risks of a military standoff on the peninsula, two major credit ratings agencies said, Monday.
"If peace is sustained, a smooth rapprochement between the Koreas would lower the geopolitical risks and be good for the credit rating of South Korea," Christian de Guzman, vice president and senior credit officer at Moody's Investors Service, said.
The agency said the declaration was a prelude to more substantive negotiations to diffuse the geopolitical tension generated in late 2017.
Last week, President Moon Jae-in and North Korea leader Kim Jong Un had a historic summit in Panmunjeom where the armistice agreement that suspended hostilities of the Korean War was signed 65 years ago. The two signed an agreement to seek an end to the Korean War, establish permanent and solid peace, and denuclearize the Korean Peninsula.
Guzman said the agency assessed geopolitical risk for South Korea last year, as "Moderate (+)" to incorporate an increased probability of military conflict on the peninsula and the increasingly strident rhetoric between North Korea and the United States.
"Our assessment of geopolitical risk reflects a low-probability, high-impact conflagration that would negatively affect South Korea's economy, the functioning of its government and the country's payment system," he said.
Moody's has been paying attention to the steps taken by the two Koreas to de-escalate tension.
Since last year, Pyongyang has diplomatically re-engaged with Seoul; participated in February's Winter Olympic Games in PyeongChang; announced an immediate suspension of nuclear and missile tests and the decommissioning of a nuclear test site; leading to last week's summit and the Panmunjom Declaration.
But Fitch Ratings remained neutral on how developments at the summit will change South Korea's sovereign ratings.
"The summit between the two Koreas eases tension on the peninsula, but doesn't eliminate risks associated with the military standoff," said Fitch Ratings Director Thomas Rookmaaker.
"The long-term standoff results in geopolitical risks to South Korea's sovereign balance sheet. These relate not only to the potential for conflict, but also to the possibility of reunification costs arising long term. Our AA-/Stable sovereign rating of South Korea is one notch lower than that implied by our rating model largely to take these risks into account," said the agency.
According to its observation, it's still unclear whether the summit signals the start of a permanent, structural easing of geopolitical tension on the peninsula, which has tended to rise and fall in cycles.
"The outcome of diplomatic activity in the coming months is difficult to predict, and tensions could re-escalate quickly if the United States feels that summit diplomacy is not achieving its aim of denuclearization," said the director.
Notwithstanding the shared commitment by both South and North Korea to advance the peace process, the path toward a definitive and permanent resolution of inter-Korean tension is fraught with uncertainties and complexities involving other stakeholders, primarily the United States and China.
North Korea will have a summit with the U.S. in late May or early June.
Regarding the issue about the possible outcome of the summit between the North and the United States, Guzman said; "The outcome of the proposed bilateral summit between the U.S. and North Korea will set the tone for the implementation of the common goals set out in the Panmunjom Declaration."
"In the context of recent gains in North Korea's nuclear capabilities, the specific conditions needed to compel North Korea to give up its nuclear arsenal remain unclear. Moreover, the pledge to carry out disarmament by both Koreas seems unlikely, at least in full, in the absence of more significant trust-building measures," Guzman said, adding the degree to which the U.S. and its allies would accommodate a reduced military presence in South Korea was unclear.
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