N.K. risk adds new worries to S. Korean economy

SEOUL, Aug. 21 (Yonhap) -- The latest provocation by North Korea is emerging as a fresh drag on the South Korean economy already struggling with negative factors at home and abroad that are putting the brakes on the government's all-out efforts for a rebound, experts said Friday. On Thursday, North Korea fired shells at a South Korean front-line military unit in the western area of the heavily fortified border in apparent anger over South Korea's border propaganda broadcasts. South Korea fired back dozens of rounds, but no damage was reported in the exchange of fire. The two have put their militaries on high alert. Should the North Korea risk end in a one-off episode, its impact would be short-lived as proved in many cases before, but volatility and tension could undercut consumption, investment and the overall economic growth momentum, they said. "If the provocation ends in a one-off event, it would not have a serious ripple effect, but situations could change depending on how things unfold," said Lee Keun-tae, a fellow at the LG Economic Research Institute. "Given that there are many weary eyes on the Korean economy due to an array of external risks, yet another factor stemming from the North could ramp up market jitters and have an impact on investment as well," he added. If the North Korea risk drags on, it could make things worse for the overall economy by hurting the sentiment not just in the financial market but also in consumption and investment, observers said. Such a scenario could throw a monkey wrench in the government's efforts to engineer an economic growth rate in the 3 percent range, they said, warning the country's growth rate could tumble below 3 percent. The government has cut this year's growth forecast to 3.1 percent from the previous 3.8 percent, citing anemic consumption in the wake of the Middle East Respiratory Syndrome (MERS) outbreak, as well as slackening exports. Stock markets reacted sensitively, with the benchmark KOSPI plunging more than 3 percent at one point Friday, though it retrieved some of the loss later. South Korea's credit default risk also rose to the highest level in seven months. The credit default swap (CDS) premium for South Korean foreign exchange stabilization bonds with a five-year maturity reached 66.98 basis points, up 3.04 basis points a day earlier. The heightened inter-Korean tension and the resulting market turbulence might be the last thing that the government wants at a time when it is struggling to revive the local economy marred by slumping consumption and investment. With uncertainty over when the U.S. Federal Reserve will hike its interest rate hanging over its economy, the country has been coping with the aftermath of the outbreak of MERS that took a toll by discouraging people from spending and keeping foreign tourists from visiting. External risks, such as the recently unexpected move by Beijing to devalue its currency, are also making things worse as it confirms the fears that the Chinese economy is losing steam and Korean products might have tough competition in the world's largest market down the road. The government is heeding the concerns from the recent decision by China, with Finance Minister Choi Kyung-hwan saying during a parliamentary session on Thursday that the government is "preparing countermeasures for every possible scenario." Financial authorities were quick to alleviate market jitters, saying that the impact from the North Korea provocation on the financial market remains "limited" but vowed to stay ready for any unexpected turn. "North Korea's attack should have little impact on the country's financial sector, although downside risks associated with the United States raising its key interest rates and uncertainties coming out of China need to be checked," Vice Finance Minister Joo Hyung-hwan said. "The government is ready to respond proactively to all uncertainties." kokobj@yna.co.kr (END)