Bank of Korea Sees Growth Risks After Kim Handover in North

South Korea’s central bank highlighted potential threats to growth from instability in the North as the neighboring nation held a ceremony in Pyongyang to mourn the death of its leader, Kim Jong Il.

“Geopolitical risks” relating to the North have the potential to escalate, unnerving financial markets and causing consumption and investment in the South to contract “severely,” the Bank of Korea said in a statement released in Seoul today after a board meeting.

Officials pledged to monitor closely the North Korean situation and Europe’s debt crisis, which they said contribute to “substantial” downside risks for Asia’s fourth-biggest economy next year. Monetary policy will focus on ensuring stable prices and sound growth, the Bank of Korea said.

The government and central bank have pledged preemptive action if needed to support financial markets and the economy after the news of Kim’s death sent the won and stocks lower on Dec. 19, before recouping the losses in following days. South Korea’s Kospi index of equities was little changed as of 12:26 p.m. local time.

In Pyongyang, Kim Jong Un, North Korea’s new leader, was among tens of thousands of people who gathered for memorial services today featuring silent prayers and artillery salutes. The stability of the nation, which has the world’s fourth-largest army and 70 submarines, may depend on the ability of him and his supporters to establish a firm grip on power, according to analysts including Rod Lyon, a program director at the Australian Strategic Policy Institute.

‘Risk Factors’

“Given the high degree of uncertainty surrounding the domestic and international economies, the bank will keep a close eye on the evolution and knock-on effects of risk factors such as the situation in North Korea and the sovereign debt crisis in Europe,” the Bank of Korea said.

The central bank kept its benchmark interest rate unchanged at 3.25 percent on Dec. 8 for a sixth month, the longest pause since tightening began in July 2010. It projected this month that the economy will expand 3.7 percent in 2012 from 3.8 percent this year.

“After showing signs of a mild slowdown for some time, domestic economic growth is forecast to recover from the second half of the year, but the downside risks will be substantial due mostly to the possibility of external conditions deteriorating and to uncertainties concerning North Korea,” the central bank said today.

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