South Korea should boost financial preparations for an economic failure of communist North Korea, the credit rating agency Standard & Poor's said yesterday.
S&P, whose views are important as they influence the interest rate South Korea pays on its loans, also said it was closely watching for any effect on South Korea's economic reforms from plans by President Roh Moo-hyun for a referendum on his rule.
A meltdown of North Korea's economy, which is dead in all but name, could cost South Korea much more than its financial sector collapse did in 1997 and could lead to a downgrade in South Korea's ratings, S&P said in a statement in Seoul.
"Although some other Asian nations that used to have centrally planned economies have successfully moved to a market-based system, the North Korean leadership probably lacks the flexibility and the vision to undertake such a change," it said.
The government in Pyongyang has had limited success in tinkering with price reforms in an isolated country of 23 million people wracked with dire food and energy shortages.
"Unless South Korea has substantially built up fiscal reserves in the meantime, its ratings would fall from their current level upon sudden reunification of the peninsula," it said.
S&P puts South Korea, Asia's fourth-largest economy, in the same group as Malaysia, Hungary and Israel, by assigning an A-minus rating for the country's long-term foreign currency debt.
Roh shocked the country when he proposed an unprecedented referendum next month on his rule, after a close aide was arrested for taking bribes.
S&P said it was watching to see whether the political uncertainty over the proposed vote would affect private- and public-sector economic reforms.
"Standard & Poor's will be watching closely how the current political developments affect the government's capacity to undertake these reforms," the ratings agency said.
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