South Korea: North Korea’s tension unlikely to derail recovery - Natixis

Analysts at Natixis note that the heating up of North Korea (NK)’s difficult relations with the US and the risk of a military conflict shook financial markets’ confidence last week, but is unlikely to derail South Korea’s recovery.

Key Quotes

“Some of the fear has dissipated thanks to a reported story on North Korea’s decision not to launch an attack on Guam. Still, South Korean risky assets have not yet fully recovered as the structural issues of the geopolitical conflict remain.”

“We explore how the North Korean Crisis (NKC) may impact South Korea’s economy under the most likely scenario, which in our view is that of a muddle-through, in which South Korea continues to be on high alert due to North Korea’s related tensions but without a major change of direction or military event.”

“In such scenario, South Korea’s economy is unlikely to be materially impacted by North Korea’s related tensions as it is basically an escalation and not a change in the status quo. We argue that because investors also share our assessment of the NKC, investment - the most important transmission channel because of its dependence on the degree of uncertainty - has been on the rise for months, and we expect that trend to continue. As for foreign capital, there is no evidence of a relevant unwinding yet, and, even if there were, it would not be as significant as in the past given South Korea’s large current account surplus. Moreover, the country is undergoing a cyclical upturn thanks to higher global trade and better sentiment on domestic politics, which is unlikely to be derailed by North Korea’s related tensions. Finally, South Korea’s Parliament recently passed a fiscal supplementary package that can boost growth by another 0.5%.”

“Under such circumstances, we doubt that South Korea’s GDP growth can fall short of 2.9% in 2017 even at the currently heightened level of tensions with North Korea. We even expect a slight improvement in GDP growth in 2018 (3.0%). Beyond 2018, the South Korea economy’s potential growth will deteriorate to 2.5% – and not because of geopolitics but on drastically worsening demographics.”