Analysis: S.Korea suffering from fallout

By JONG-HEON LEE, UPI Business Correspondent

SEOUL, Feb. 12 (UPI) -- With his inauguration two weeks away, South Korea's president-elect, Roh Moo-hyun, is facing an uphill battle to tackle rising economic uncertainties largely coming from a communist neighbor, North Korea.

Analysts here warn the world's 14th biggest economy may slip back into recession if the incoming leader fails to cope with the challenges of rising oil prices and market turmoils from its geopolitical risks.


In a warning sign on Tuesday, international ratings agency, Moody's Investors Service slashed South Korea's ratings outlook by two notches from "positive" to "negative," voicing fears about the impact of the North Korean nuclear crisis on South Korea's economy.

Moody's said its outlook change was prompted by "heightened security concerns stemming from North Korea's nuclear weapons program."

The agency said South Korea's long-term rating remained unchanged at A3. But its "negative" outlook means it can lower South Korea's sovereign rating which had been raised from Baa2 to A3 in March of 2002. It had raised its rating forecast to "positive" from "stable" in November.


The rating applies to the country's ceiling on foreign currency bonds and bank deposits of other entities within its borders and the government's domestic and foreign currency denominated obligations.

The move by the New York-based global risk evaluator is likely to hit international investor confidence in the South Korean economy, economists say. They expressed concerns that Moody's measure is likely be followed by similar actions by other international ratings agencies, such as Standard and Poor's and Fitch.

Moody's move was the first time an international ratings agency has taken a concrete step in regard to the North Korean nuclear standoff since it was sparked late last year. The gloomy outlook was also a fresh reminder of the perils of South Koreans living next to North Korea that invaded the South in 1950.

Moody's described North Korea's recent moves as "more provocative than past moves or threats." In a statement, the agency said "increased uncertainty regarding North Korean actions has reduced the likelihood that South Korea's ratings could move up in the near future."

The North Korean threats have "introduced the possibility that the rating could move down should the security environment on the peninsula continue to deteriorate," it said.


Moody's also cut the debt and deposit ratings of South Korea's five major banks to negative from stable. They are Export-Import Bank of Korea, Industrial Bank of Korea, Kookmin Bank, Korea Deposit Insurance Corp. and Korea Development Bank.

The agency also downgraded to negative the outlook for the A3 foreign currency ratings of the Korea Electric Power Corp., Korea Hydor and Nuclear Power Co. Ltd. and KT and G Corp.

The news of the downgrade rattled the country's financial markets which was already tumbling due to threats of war in Iraq.

Analysts said the downgrade would lead to falls in the prices of South Korea's foreign exchange stabilization bonds as the country prepares a billion-dollar issue of the bonds in April.

The South Korean government was caught by surprise by the downgrade. "I believe today's action reflects the view of Moody's analysts who assessed the North Korean nuclear issue seriously," Kwon Tae-shin, the international financial chief at the Finance-Economy Ministry, told a press conference.

"The downgrade came amid signs of economic downturn and rising oil prices," said Kim Ki-seung, an economist at LG Economic Research Institute. "It can undermine the country's economy by hurting investors' confidence," he said.

The Bank of Korea lowered its 2003 gross domestic product forecast from 5.7 percent to 5.5 percent, citing uncertainty sparked by the nuclear crisis in North Korea and threats of war in Iraq.


But Roh's presidential transition team ruled out any significant impact on the economy of the North Korean nuclear threats. "The Moody's downgrade is very surprising given that they upgraded Korea last year," said an official at the transition team. "But the Moody's move did not reflect the country's economic fundamental, but mainly external risks," he said, speaking on condition of anonymity.

The central Bank of Korea also said it would seek no specific plans in response to the Moody's decision. "The country's economic growth is slowing as mounting geopolitical risks hurt consumer and investor sentiment, but the economy is still expected to post a healthy expansion in 2003," said Lee Sung-tae, a senior official at the bank.

But the Moody's decision clearly caught the new Roh government by surprise as it has notified the country of their decision not to change South Korea's sovereign rating at least until April. "We are very shocked by this sudden move," said the Roh close aide.

Roh is also facing a tough task to overcome allegations that his predecessor had bribed North Korea to stage a historic summit in 2000 with his defiant counterpart, Kim Jong Il.

Hyundai Group secretly remitted $150 million to bank accounts held by Kim Jong Il one month before his summit in June, the opposition party said. State-run banks have allegedly given billions of dollars to Hyundai since then for the North Korean projects.


A former intelligence officer has revealed that Kim Dae-jung funneled some $1.7 billion to his North Korean counterpart in return for holding the summit, and lobbied foreign countries to get the 2000 Nobel Peace Prize.

The payoff scandal is a heavy burden on Roh who takes office Feb. 25 for a 5-year term. Roh, who was elected on an inter-Korean reconciliation platform, hopes Kim will clear up the payoff allegations before he steps down. But Kim has refused to come clean about the payoff scandal.

"The scandal has finally lowered South Korea's international credibility, thus sapping the vitality of an economy already showing a downturn," said Lee Burn-song, an economic professor in a Seoul university. "The incoming president is strongly urged to seek all-out national efforts to get through the looming crisis," he said. "If not, the country may face another economic crisis."

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