Bloomberg News

North Korea Transition Adds Risk as South Korea Exports Slow

December 20, 2011

(Updates stocks in fifth paragraph. Please see EXT2 <GO> for more coverage on aftermath of Kim Jong Il death.)

Dec. 20 (Bloomberg) -- Kim Jong Il’s death and the risk of instability in North Korea may weigh on business and consumer confidence in South Korea just as the central bank warns of threats to growth and exports falter.

Finance Minister Bahk Jae Wan yesterday pledged preemptive action if needed to support financial markets and the economy as the won and stocks fell. The central bank will “closely monitor” developments and stabilize markets if needed, Governor Kim Choong Soo said.

Moves toward Kim Jong Un’s succession after his father’s 17 years of rule are a distraction for South Korean officials steering their nation through an export slowdown triggered by Europe’s debt crisis. The government is forecasting that shipments will grow in 2012 at less than half of this year’s pace and the central bank said Dec. 8 that “downside” risks for the economy are dominant.

North Korea’s transition “may hurt confidence in the short term,” said Kwon Young Sun, an economist at Nomura Holdings Inc. who worked at the central bank for 14 years through 2006. He added that the government will “do whatever it takes” to boost sentiment if necessary.

The Kospi index of stocks rose 0.8 percent as of 1 p.m. local time today after slumping 3.4 percent yesterday, the biggest decline in five weeks. Kim’s death sparked concern there could be a power struggle in the nation, still technically at war with the South.

North Korean Attack

Risks from North Korea are rising “sharply,” Bahk said in Seoul. South Korea has recovered quickly from past North Korea- related shocks, he added.

Four South Koreans died in November last year when the North shelled Yeonpyeong Island in retaliation for South Korea firing rounds into disputed waters during a training exercise. Relations soured earlier in 2010 over the sinking of a South Korean warship, killing 46 sailors.

“It is too early to say how the situation will evolve after Kim Jong Il’s death, but political developments demand close attention,” Fitch Ratings said in a statement yesterday. Fitch, Standard & Poor’s and Moody’s Investors Service saw no immediate implications for South Korea’s credit rating.

Exports, Consumption

“Business confidence may be affected, especially when external demand is quite weak already,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. At the same time, any impact may be “relatively short-lived” because the leadership transition was planned and hence less risky than otherwise, she said.

South Korea’s exports, equivalent to half of the economy, may increase 7.4 percent next year, down from a 19.2 percent gain this year, according to the finance ministry. At home, sales at major department stores fell last month for the first time since February 2009, government data show.

Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said that consumer confidence may slide and any instability in North Korea could be an extra reason for the central bank to cut rates in January after leaving them on hold for six straight months. ‘

North Korea’s state media yesterday called for citizens to “loyally follow” Kim Jong Un, who is at the “forefront of the revolution.” Royal Bank of Scotland Group Plc said Kim’s death had increased the chance of the regime collapsing through a coup or a failed attempt to reform the political and economic system.

One Volatile Week

The harm to South Korean confidence may be limited because the nation is used to “living with uncertainty and occasional attacks,” Erik Lueth, a Hong Kong-based economist for Royal Bank of Scotland. He said that some institutions may reduce their investments in South Korea and markets may remain volatile “over the next week or two.”

Goldman Sachs Group Inc. said in a note that “historically, the impact of events in North Korea on the Kospi has not lasted more than a week, and we do not see any reason why the situation would be different now.”

South Korea’s economic growth will slow to 3.7 percent next year from 3.8 percent this year and 6.2 percent last year, the nation’s finance ministry says.

The leadership change comes “at a challenging time for the South, where the economy is already facing stiff external headwinds,” said Frederic Neumann, an analyst at HSBC Holdings Plc in Hong Kong.

--With assistance from Sophie Leung in Hong Kong. Editors: Paul Panckhurst, Brett Miller.

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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