Tensions won’t affect credit: S&P

Despite geopolitical tensions on the Korean Peninsula reaching new heights after Pyongyang’s latest nuclear test, South Korea’s sovereign credit rating is not likely to change in the near future, a senior director at S&P said Thursday.

Kim Eng Tan, who leads the agency’s Asia-Pacific sovereign ratings team, said Korea’s score will likely remain stable at the current AA level in the next one or two years as neither a military conflict nor significant positive breakthrough is likely.

“We don’t believe that conflict is imminent because it is in no one’s interest to have conflict,” Tan said during a media briefing at S&P’s Korea office in central Seoul. “The reason why they [North Korea] invest so much in weapons is basically to force the U.S. to recognize them as a normal country despite their political system.”

Still, an upgrade might be possible if North Korea reverses its bellicose stance and normalizes its economy, though such a scenario is not likely to occur in the near future, Tan said.

While the provocations won’t affect South Korea’s credit rating, it could stunt economic growth, the analyst said. The geopolitical risk might limit domestic consumption, preventing gross domestic product from growing 3 percent this year.

S&P projected last month that Korea’s GDP would grow just 2.8 percent this year.

Tan assessed that Korea faces a more checkered second half this year, beset by North Korea’s threats and disputes with China over the Terminal High Altitude Area Defense missile shield that has led to trade friction between the two countries.

Korea’s consumer sentiment index fell in August from a month earlier to 109.9, down from 111.2 in July, according to the Bank of Korea.

A reading above 100 indicates the majority of survey participants maintain a positive outlook on the national economy, while a reading below 100 indicates a largely negative view.

The index had been rising since May, when Moon Jae-in was elected president, and reached a six-year high in July before falling in August.

If tensions develop into war, Tan said, it will deal a huge blow to South Korea’s economy and credit. He added that any conflict could affect the ratings of other major economies like China and Japan because war between the two Koreas would likely draw in China and the United States.

Just days earlier, Fitch released a more somber report on South Korea that underscored the possibility of trade disruptions between China and the United States.

“Heightened tension over North Korea’s nuclear weapons programme could have a substantial impact on South Korea’s economy and cause broader effects if it disrupts trade relations, most notably between China and the U.S.,” the ratings agency said in its report Monday.

“Most notably, the U.S. administration could take trade measures against China - which is by far North Korea’s most important trade partner - if it perceives that China’s economic and diplomatic pressure on the North is inadequate.”

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]