Pyongyang's maneuver has limited direct impact on financial markets
By Yoon Ja-young
North Korea's missile launch Sunday will have a limited impact on Seoul's financial market, but it will likely further weigh on the economy regarding its conflict with China over a Terminal High Altitude Area Defense (THAAD) system, according to analysts Monday.
“Previous provocations by North Korea had a temporary and limited impact on our financial market. However, for the short term, volatility may increase in both the financial market and the real economy,” Strategy and Finance Minister Yoo Il-ho said at a meeting with ministry staff.
Due to past experience, investors seemed to remain calm despite North Korea's provocations.
Pyongyang conducted its first nuclear test Oct. 9, 2006, which pulled down the main index KOSPI by 2.41 percent. The regime's second, third and fourth nuclear tests, however, pulled down the index by only between 0.2 and 0.26 percent. On Jan. 6 last year, the KOSPI fell a mere 0.26 percent despite North Korea's announcement that it succeeded in a hydrogen bomb test.
Its fifth nuclear test on Sept. 9 last year did affect stocks and the foreign exchange rate, with the KOSPI falling 1.25 percent, but both stocks and foreign exchange rates recovered to previous levels in a few days.
Despite past experience, the government said it is cautious this time as it is the first provocation since the inauguration of President Donald Trump's administration in the United States. This means things can evolve differently from the past depending on the reaction from Trump who is expected to take a tough stance.
The government said it will examine risk factors for the financial market, as well as strengthening communication with foreign investors, media, and credit rating agencies to deter any negative impact on Korea's credit ratings or investor sentiment.
Kim Yong-gu, an analyst at Hana Financial Investment, said that the missile launch could have a negative impact in the longer run though its short-term impact will be limited. He said it is especially worrisome since the provocation gave the Trump administration the rationale to get tough with North Korea. “The U.S. President has been making strong remarks against North Korea's missile launch,” he said, pointing out that tension will likely escalate.
Analysts say that the conflict with China over Korea's decision to deploy a U.S. Terminal High Altitude Area Defense (THAAD) anti-missile defense battery is more worrisome than the missile launch itself. While Korea decided to adopt THAAD to protect itself from North Korea's threat, China has been opposing the move, saying it threatens its security. It has been taking actions deemed as economic retaliation, including the cancellation of cultural events and stricter customs regulations.
“If THAAD gets more momentum following the missile launch, China-related consumer goods stocks that had plunged due to China's retaliatory actions will need more time to make a rebound,” Kim Byung-yun, an analyst at NH Investment and Securities, said.
Han Jae-jin, an analyst at Hyundai Research Institute, said that Beijing may expand retaliatory actions to overall manufacturing sectors, which would seriously damage the Korean economy that closely relies on China.
“China has been expanding non-tariff barriers, including sanitary and phytosanitary measures,” he said, expecting stronger barriers to come.
“The rising non-tariff barriers from China will be a big stumbling block for Korea's economic recovery,” he said. The researcher advised businesses to strengthen networks and partnerships with Chinese companies to minimize any damage.