South Korea’s economy is able to withstand external shocks from North Korea’s third nuclear test given the South’s strong market foundation, economists in Seoul said.

They said the effect of the North’s provocation on Tuesday, ahead of U.S. President Barack Obama’s State of the Union address, on the South Korean economy and financial market would be “extremely limited,” and that the North Korean nuclear capability was more of a political issue than an economic matter.

“Shocks from North Korea’s nuclear test will not affect the South Korean economy in the mid or long term, just like previous weapons tests by the North,” said Kang Hyun-gu, economist at Hyundai Securities.

The only business that might be affected by the North’s third test would be the joint Gaeseong business on the inter-Korean border, Kang said.

However, risk factors associated with Gaeseong have already been taken into account by South Korea and investors, and do not significantly impact the South’s economy whose main growth driver is exports.

The Ministry of Unification said that it did not detect any signs of risks or danger at Gaeseong.

Kim Chul-joong, an analyst at Korea Investment & Securities, also noted that North Korea’s nuclear test was expected, and like the previous two nuclear tests, shocks on South Korean stocks and currency would be “extremely ephemeral.”

Morgan Stanley had noted that South Korea was no longer exposed to geopolitical risks from North Korea.

“There is no reason to give this any special meaning given that geopolitical factors (concerning North Korea) have already been reflected on South Korea,” said Kang Hyun-cheol, strategist at Woori Investment & Securities.

He added that the North’s test was not likely to affect South Korea’s credit ratings.

Seoul steps up market monitoring

South Korean financial authorities stepped up market monitoring and held emergency meetings to check their contingency plans after North Korea pushed ahead with its nuclear test despite warnings from international communities.

At the emergency meeting of the Financial Supervisory Service, senior officials closely monitored investors’ movement on the stock and foreign exchange markets.

“While the North’s nuclear test is estimated to have little impact on the financial market, we’ve decided to closely monitor response among foreign investors through our overseas liaison offices,” an FSS spokesman said.

He said the regulator will minimize volatility in major financial indices by holding a series of emergency meetings over the next few weeks.

On the day, the Financial Services Commission and the Bank of Korea also each held panel meetings.

South Korean stocks fell only 5.11 points, or 0.26 percent, to close at 1,945.79 with the North’s nuclear test having little effect on the market, analysts said. The Korean won gained 4.9 won against the dollar to reach 1,090.8 won.

Though the KOSPI dropped sharply right after the news of the nuclear test, it recovered somewhat, buoyed by “purchase” orders by foreign investors.

Foreigners reduced the extent of the fall of stock prices as they net purchased stocks worth 135.3 billion won ($125.2 million). Small investors were also net buyers, while institutional investors net sold stocks worth 161.2 billion won.

Many research analysts shared the view that risks from the North’s nuclear test have already been reflected in the stock and foreign exchange markets, as continuous symptoms from months before.

North Korea’s first test on Oct. 9, 2006, with an explosive power of about 1 kiloton, fizzled out, and South Korea’s KOSPI dropped a mere 2 percent on that day, with most of sell-offs made by retail investors. Foreign and institutional investors retained their buying positions.

The second test on May 25, 2009, which was seen as a “half success,” exploding with about 2 kilotons, weighed the KOSPI down just 0.2 percent.

Analysts noted that the market immediately rebounded the day following the North’s tests, and fully recovered to surpass previous levels in less than five trading days.

By Park Hyong-ki and Kim Yon-se
(hkp@heraldcorp.com) (kys@heraldcorp.com)