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S&P: Nuke Deal Could Boost Korea Ratings

If North Korea follows through on its agreement South Korea could see improvement, as long as geopolitical risks are reduced

From Standard & Poor's RatingsDirectThe six-party talks pushing for the nuclear disarmament of the Democratic People's Republic of Korea (North Korea) have reportedly reached a tentative agreement that may see North Korea shut down its nuclear reactor in exchange for energy and other economic aid. A meeting is under way that aims to reach a final agreement.

Such an agreement may reduce the geopolitical risk that constrains the ratings on the Republic of Korea (foreign currency: A/Stable/A-1; local currency: A+/Stable/A-1), but clear evidence of North Korea's commitment to nuclear disarmament is a prerequisite to any future positive ratings action.

According to media reports, the main contents of the agreement are that North Korea will initially close and seal its nuclear reactor in Yongbyon within 60 days after the agreement (at this stage, it's unclear whether the final agreement will include a provision that North Korea dismantle its nuclear reactor), and also hand over a list of its nuclear facilities to the other five members of the six-party talks. In return, the five nations will provide half a million tons of heavy oil to North Korea annually.

Evidence Needed

If further steps were taken toward denuclearization in North Korea, then the five nations would supply additional energy resources, up to another half a million tons equivalent of heavy oil. In addition, five sub-committees of the six-party talks will be set up to discuss specific issues such as economic cooperation with North Korea, regional security in northeast Asia, and the normalization of official relationships between North Korea on one hand, and the U.S. and Japan on the other.

If a final agreement is reached on nuclear disarmament of North Korea in the six-party talks it would be a positive step toward reducing the tension on the Korean Peninsula. However uncertainty remains as to the level of North Korea's commitment to fulfilling its side of the agreement. It signed a similar agreement to stop its nuclear program in 1994, only to continue to develop nuclear weapons.

It will therefore take some time to see whether nuclear disarmament of North Korea will proceed or not. If there's concrete evidence for such progress, Korea's sovereign credit ratings could be upgraded, depending on the degree to which geopolitical risks are reduced. If the process stalls or fails to get underway, Standard & Poor's current ratings would be maintained.

In such a scenario, Korea would need to make progress in other areas to improve its sovereign ratings—such as structural reforms in the public and small- and medium-enterprise (SME) sectors, as well as the area of labor relations—and create a more market-oriented style of economic management by reducing the level of government intervention.

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