Q&A: How will tension with North hit South Korea’s economy?

By Yoo Choonsik

SEOUL (BestGrowthStock) – Investors at first shrugged off North Korea’s heaviest shelling of the South since the end of the civil war in 1953 but later sold the won and bonds as the tension failed to subside.

Adding to the drama on the world’s last cold war frontier on Sunday, a U.S. aircraft carrier joined maneuvers with South Korea off the west coast of the peninsula and less than 150 km (90 miles) from the site of the North Korean attacks on Sunday.

South Korea says its economy, the fourth-largest in Asia, is healthy enough to weather such external jitters.

HOW HAVE INVESTORS REACTED SO FAR?

Foreigners sold a net 70 billion won ($60 million) of South Korean shares in the three days after Tuesday’s attack — negligible in a market valued at more than 1,000 trillion won. Local investors sold a net 450 billion won worth over the period.

The won held almost steady for the first two of the three days but fell nearly 2 percent against the dollar on Friday, the worst drop in five months.

Foreigners sold a net 230 billion won worth of bonds on Friday alone, helping lift the benchmark 5-year treasury yield 5 basis points to 4.03 percent, after having showed a muted reaction for the previous two days.

The credit default swaps on 5-year South Korean sovereign bonds — a measure of country risk — widened by nearly 25 basis points to 108 points, but stayed well below a 52-week high of 172 points.

HOW WILL ESCALATED TENSION HIT?

Foreigners have poured nearly 90 trillion won into South Korea’s bond and stock markets since the start of 2009 as the country pulled out of the global financial crisis. They may opt to leave en masse if tension escalates.

But the impact may be smaller this time than in late 2008 when South Korea suffered a severe dollar shortage. The country has since cut short-term foreign debt sharply while boosting foreign reserves by about one-fifth.

An undervalued won, robust exports and high profit prospects for South Korean technology and car makers could persuade many foreign investors to stay.

Consumer spending at home, which has begun to take over from exports as the driver of economic growth, could still be hit and the economy could lose steam rapidly.

SO WHAT CAN THE AUTHORITIES DO?

South Korea has room to protect its economy as fast economic growth has improved government finances and robust exports led by cars and electronics products fattened foreign currency (Read more about trading foreign currency. reserves.

The fiscal deficit will halve this year from more than 4 percent of annual gross domestic product last year. Foreign currency reserves — at nearly $300 billion — are the world’s sixth largest and government debt is relatively small.

The Bank of Korea, the central bank, also has some room to maneuver after raising the policy interest rate by half a percentage point this year and has re-collected most of the emergency funds injected during the global financial crisis.

(Editing by Nick Macfie and Andrew Marshall)

Q&A: How will tension with North hit South Korea’s economy?