SEOUL – As officials from South Korea’s Finance Ministry and central bank rushed into 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 currency slid to a three-month low and stocks dropped as much as 1 percent on Wednesday in Seoul, the immediate reaction from the Bank of Korea was calm and assured. Foreign exchange official Park Jun-seo said the Bank of Korea 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 Kim Jong Un’s regime. A ferry accident off the country’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,” said Hong Jun-pyo, an economist for the Hyundai Research Institute in Seoul. “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, said the BOK’s Park. Still, 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.
And an interest-rate increase from the U.S. Federal Reserve adds to the risk of investors pulling funds out of emerging markets like South Korea. While capital outflow from the nation’s financial market is an unlikely scenario, gradual interest rate increases could put more pressure on marginal companies and households, Finance Minister nominee Yoo Il-ho said in a report to parliament Tuesday.
More modest growth in China, South Korea’s biggest trading partner, also adds to economic concerns as exports slumped for 12 straight months in 2015.
The won fell 0.8 percent to close at 1,197.20 per dollar on Wednesday after touching a three-month low, extending this week’s losses amid volatility in Chinese stocks and a drop in exports. The Kospi index fell 0.26 percent to 1,925.43.
The South Korean government will prepare steps to stabilize financial markets if necessary, Jeong Chan-woo, vice chairman at the Financial Services Commission, said at a meeting of top government economic officials Wednesday. The government will strengthen communication with the markets, he said.
Meanwhile, the BOK said in a statement Wednesday after a meeting to discuss North Korea’s impact that the central bank expects the event to have “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.
The share of South Koreans who view unification as necessary rose to 55.8 percent in 2014 from 54.8 percent a year earlier, according to a study by the Institute for Peace and Unification Studies at Seoul National University. The ratio declines to 43 percent among those aged 19 to 29.