Bloomberg News

Moody’s, S&P Say Kim Death Unlikely to Alter S. Korea Rating

December 28, 2011

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

Dec. 19 (Bloomberg) -- The death of North Korean leader Kim Jong Il is unlikely to affect South Korea’s sovereign ranking even as the event brings the risk of a difficult transition, credit rating companies said.

Moody’s Investors Service will continue to rate South Korea on economic and financial “fundamentals,” Thomas Byrne, a senior vice president in Singapore, said in a telephone interview today. Standard & Poor’s ranking of the country has taken into account “temporary disruptions in security risks,” credit analyst Kim Eng Tan said in a separate interview.

Geopolitical threats posed by North Korea’s nuclear weapons development and tests, and military attacks on its neighbor have weighed on South Korea’s ratings. The leadership transition in the North adds to risks for Asia’s fourth-largest economy, which is already contending with slowing export growth as Europe’s debt crisis dents global demand.

“We recognize that the collapse of the North Korean state or an outbreak of war pose an event risk for South Korea, which will have severe implications,” said Byrne, who served in South Korea in the 1970s with the U.S. Peace Corps. “We consider the likelihood to be remote even under the current uncertain situation.”

Military Backing

Kim Jong Il died two days ago and North Korea said its people and military back Kim Jong Un, his third son, as leader of the country of 24 million people.

Moody’s has an A1 rating on South Korea, while Fitch Ratings last month raised its outlook on its A+ ranking to positive. Both are the fifth-highest ratings of 10 investment- grade levels, while S&P rates the nation’s debt one step lower with an A ranking.

“Fitch does not view Kim Jong Il’s death as a trigger for negative action on South Korea’s sovereign ratings in itself,” Andrew Colquhoun, head of Asia-Pacific sovereigns, said in an e- mailed statement today. When changing the rating outlook, “we pointed to the situation with the North as a potential source of downside risk. For now, it’s much too early to say risks have materially increased.”

South Korea called in police officers for emergency duty, considered raising alert levels for the military and pledged steps by the central bank if needed to stabilize financial markets.

Security Risk

North Korean state media called for citizens to “loyally follow” Kim Jong Un, thought to be 28 or 29, who is at the “forefront of the revolution.” He was first mentioned in the official Korean Central News Agency dispatches on Sept. 28, 2010, when his appointments as general and vice chairman of the Central Military Commission of the party were announced.

A succession that “isn’t smooth” and results in either a security situation or a collapse of the North Korean regime will have some “negative impact” on South Korean ratings, Tan of S&P said.

“Our ratings take into account possible, temporary disruptions in security risks,” he said. “As long as it is temporary, there is no impact. The main thing we are looking for now is smooth succession.”

Tensions on the peninsula have risen since attacks last year that killed 50 South Koreans. North Korea shelled a South Korean island in November 2010, killing four people. It has denied an international report blaming Kim’s regime for the torpedoing of a South Korean warship in March 2010 that killed 46 sailors.

Atomic Reactor

North Korea said last month it was making progress in building a light-water atomic reactor and producing low-enriched uranium. The U.S., Japan and South Korea have all urged China, North Korea’s biggest ally, to persuade it to return to six- nation nuclear disarmament talks that were abandoned in April 2009.

South Korea’s economy expanded more than the central bank initially estimated in the third quarter as exports of cars and metal products increased. Gross domestic product grew 0.8 percent over the three months through September from the second quarter, compared with an October estimate of 0.7 percent, the Bank of Korea said Dec. 6.

“We don’t see any deterioration of the economic fundamentals” for South Korea, Byrne said. “The government finances are strong, the budget is in surplus, and government debt is contained.”

--Editors: Stephanie Phang, Paul Panckhurst

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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