Korea Geopolitical Risks Rise With Gaeseong Closure: Moody's

  • Moody's says higher regional risks are negative for sovereign
  • Inter-Korean industrial park shut down after North's missile

The closure of a jointly run industrial park following North Korea’s rocket launch and nuclear test heightens geopolitical risks for the South, Moody’s Investors Service said, two months after giving the nation its highest-ever credit rating.

While at this point Moody’s doesn’t think there is a “material difference” to previous inter-Korea events, heightened political risks are credit-negative for the sovereign, Steffen Dyck, a senior analyst for the sovereign risk group at Moody’s, wrote in a Feb. 12 email to Bloomberg.

North Korea fired a long-range rocket on Feb. 7, just a month after conducting its fourth nuclear test. The act drew immediate condemnation from the global community, with the U.S. Senate voting to authorize new sanctions against the North and the United Nations Security Council vowing to adopt a resolution with significant new sanctions.

South Korea said Feb. 10 it would pull companies and workers from the Gaeseong Industrial Complex, removing the last remaining symbol of economic cooperation with the North. North Korea responded the next day, saying it would freeze the assets of more than 120 South Korean companies operating there. It ordered its army to occupy the complex.

Moody’s raised the rating for South Korea’s debt to Aa2 from Aa3 on Dec. 19, with a stable outlook, citing its relatively strong economic and fiscal performance. It was the first time the country received the third-highest ranking from a major ratings company. Moody’s noted in the December statement that heightened geopolitical risk was one factor that could lead to a negative rating action. Standard & Poor’s and Fitch Ratings both ratethe nation AA-, their fourth-highest ratings.

“While geopolitics pose a salient risk for South Korea, we expect Seoul’s robust alliance with the US and China’s influence to contain the risk of direct conflict between North and South,” Dyck said in the Feb. 12 e-mail. “Still, merely the perception of geopolitical risk can hurt a country’s capital, current and fiscal accounts, making it harder for it to service its debts.”

Fitch Ratings, which affirmed the AA- rating for South Korea on Feb. 2, said Feb. 11 that it didn’t see recent inter-Korea developments as putting pressure on the nation’s rating.

“Recent developments don’t affect our fundamental analysis that it is not in anyone’s interest to provoke a conflict in Korea, North or South,” Andrew Colquhoun, head of Asia- Pacific sovereign ratings at Fitch, said in an email to Bloomberg on Feb.11, before the North’s announcement related to Gaeseong later that day. “We view recent events as within the pattern of on-again, off-again relations between North and South Korea that we have seen for years.”

Gaeseong accounts for 0.04 percent of South Korea’s gross domestic product and its closure will have a minimal impact on the economy, the finance ministry said in a Feb. 10 statement. While previous provocations by the North had only a limited impact on South Korean financial markets, market volatility may rise if combined with external risks including China’s economic woes and lower oil prices, the finance ministry said in a separate statement.

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