Bloomberg News

South Korea Ready to Intervene as Kim’s Death Clouds Outlook

December 20, 2011

(Please see {EXT2 <GO>} for more coverage on aftermath of Kim Jong Il death.)

Dec. 19 (Bloomberg) -- South Korea said it’s prepared to intervene in markets as the death of North Korean leader Kim Jong Il clouded the outlook for an economy already faltering on weak export demand.

The central bank will “closely monitor” developments and stabilize markets if needed, Governor Kim Choong Soo said today as the won and stocks tumbled. Finance Minister Bahk Jae Wan echoed those comments. Officials are holding an emergency meeting at 4 p.m. local time in Seoul.

The threat to South Korean confidence from the risk of instability in the North comes as Europe’s debt crisis pares export demand and the government forecasts slower growth next year. Kim’s death has increased the chance of the North Korean regime collapsing, through a coup or a failed attempt to reform the political and economic system, Royal Bank of Scotland Group Plc said today.

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.

Moody’s Investors Service said Kim’s death is unlikely to change the “economic and financial fundamentals” of the South. Fitch Ratings said the event was not a “ratings trigger in itself.”

Shares Tumble

The won sank 1.6 percent to 1,177 per dollar as of 1:48 p.m. local time and the Kospi index of shares tumbled 3.3 percent. North Korea’s state media called for citizens to “loyally follow” the dead dictator’s son, Kim Jong Un, who is at the “forefront of the revolution.”

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.

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.

Risks for the South include military strikes. North Korea shelled a South Korean island last year, killing four people. It has denied an international report blaming Kim’s regime for the torpedoing of a South Korean warship that killed 46 sailors.

‘Living With Uncertainty’

Erik Lueth, a Hong Kong-based economist for Royal Bank of Scotland, said some institutions may reduce their investments in South Korea and markets may remain volatile “over the next week or two.” At the same time, the nation’s citizens are used to “living with uncertainty and occasional attacks’ and for that reason the threat to confidence is limited, he said.

“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 the impact may be “relatively short-lived” because the leadership transition was planned and hence less risky than otherwise, she said.

Gross domestic product 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.

“Investors may lose some confidence in South Korean assets, including bonds, but they will likely return unless North Korea collapses suddenly,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul.

--With assistance from Sophie Leung in Hong Kong. Editors: Paul Panckhurst, Lily Nonomiya.

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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