ⓕ font-size

  • -2
  • -1
  • 0
  • +1
  • +2

'US-NK summit credit positive for Korea'

By Kim Yoo-chul

An agreement between the leaders of the United States and North Korea committing to "complete denuclearization" of the Korean Peninsula is a credit positive for South Korea, a global credit ratings agency said Wednesday.

"The rapprochement came so fast that it's hard to believe. S&P Global Ratings believes these recent developments could benefit sovereign creditworthiness in northeast Asia. This is especially the case for South Korea," S&P said in a statement.

South Korea's sovereign rating is currently at AA, which means "stable." But the statement didn't mention the timing for when it will revise up its view on South Korea because a sustained reduction in geopolitical risk will take time to materialize.

"Geopolitical risks from its relations with North Korea, and the contingent liabilities of an abrupt reunification, are key constraints on the ratings of South Korea. The next three years or so are unlikely to see policy shifts that translate to materially lower regional sovereign credit risks," according to the statement.

Its rationale is that the weight of potential unification costs on the South Korean sovereign ratings will "only lessen" after a significant period of economic development in North Korea.

The summit in Singapore is unlikely to change the incentives facing the North Korean leadership. North Korea's closed economy and the existing sanctions on the country limit the impact of external volatility.

"These conditions would change only if sanctions on North Korea ease significantly and the country makes substantial progress in economic reforms. If global trade and financial ties do strengthen, then North Korean decision makers would have larger economic interests to weigh against the gains of future provocations," it said.

S&P expects a "stronger North Korean economy" could reduce unification-related contingent liabilities facing the South Korean government, as the current economic and infrastructural gaps between the two Koreas are much larger than those that existed between East and West Germany back in 1990.

"Even with the benefit of lessons learned from the German reunification, the costs of a potential unification are likely to place a heavy burden on budgets for a long time. It would take many years of robust growth and heavy investment in North Korea for our assessment of contingent liabilities on the South Korea sovereign ratings to improve materially," it said.

Given such uncertainties and challenging factors, it said only a rating committee "may determine" a rating action.

U.S. President Donald Trump declared success after his summit with North Korean leader Kim Jong-un that Pyongyang will work toward denuclearization and the United States will "end" joint military exercises with South Korea.

While the two signed a document agreeing to a handful of additional key provisions, the future still remains unclear as the two countries didn't reach any agreement on the details of how to achieve or even verify denuclearization.