As officials from the South Korean Ministry of Finance and central bank held a strategy meeting to consider the implications of North Korea’s latest nuclear test, early indications suggest that Asia’s fourth-largest economy is likely to shrug it off.
While the won slid to a three-month low and stocks dropped as much as 1 percent yesterday in Seoul trading, the immediate reaction from the Bank of Korea (BOK) was calm and assured.
South Korean foreign-exchange official Park Jun-seo said the BOK stood ready to perform smoothing operations if trading became volatile, and that risks from China’s slowdown and emerging markets remain the real issues, rather than events in North Korea.
The South Korean economy, which is more than 40 times larger than that of its northern neighbor, has lived in the shadow of a nuclear threat for more than a decade and continued to thrive.
In fact, domestic events have begun to have a greater sway over sentiment in Seoul than provocations from North Korean leader Kim Jong-un’s regime.
A ferry accident off South Korea’s southern coast and an outbreak of a deadly respiratory disease dealt bigger blows to economic activity in the past two years than missile tests and threats from Kim.
“It’s very unlikely to become a major risk to the economy,” Seoul-based Hyundai Research Institute economist Hong Jun-pyo said. “It could affect people’s sentiment, but not enough to hurt the financial market or the economy.”
Market reaction to previous nuclear tests has shown such events typically affect the currency for a few days and the same is expected this time, Park said.
However, a nuclear test adds weight to a host of other factors dragging down consumer sentiment in an economy that is seeing a slowdown in its strength in exports.
In addition, an interest-rate increase from the US Federal Reserve adds to the risk of investors pulling funds out of emerging markets such as South Korea.
More modest growth in China — South Korea’s biggest trading partner — also adds to economic concerns as exports slumped for 12 straight months last year.
In Seoul, the won fell 0.8 percent to close at 1,197.20 per US dollar yesterday after touching a three-month low, extending this week’s losses amid volatility in Chinese stocks and a drop in exports.
The KOSPI fell 0.26 percent to 1,925.43.
The South Korean government would prepare steps to stabilize financial markets if necessary, South Korean Financial Services Commission vice chairman Jeong Chan-woo said at a meeting of top government economic officials yesterday, adding that the government would strengthen communication with the markets.
Meanwhile, the BOK said in a statement yesterday after a meeting to discuss North Korea’s impact that the central bank expects the event to have a “limited negative impact” on South Korean financial markets.
South Korean President Park Geun-hye said the nation must “sternly respond” with strong international sanctions against the North, as the test could shake the security landscape of the region.
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