What the Cheonan warship incident reveals about Korea’s geopolitical risk
On May 20, it was announced by the South Korean Ministry of Defense that a North Korean torpedo was responsible for sinking the ROKS Cheonan, a corvette warship, in the Yellow Sea near the northern limit line - the contentious maritime border between North and South - on March 26. North Korea immediately threatened war, and tension rose within the Korean peninsula. Though the incident has been unfolding nonstop in Korea ever since the news of the explosion, the search for survivors, the emotional state funeral and the multinational investigation into the cause of the sinking, the market has appeared largely unconcerned - until now.
The risk of hostilities on the Korean peninsula equals more tension in higher echelons as well as the general public - and chancing worries over uncertain geopolitical risk that could influence investor movement. Ever since Seoul’s announcement designated North Korea as the Cheonan incident’s culprit, the local markets have begun a meandering downward slide. The Kospi, Korea’s benchmark index, fell 1.83 percent on May 20; it plunged 2.75 percent on May 26.
Coupled with the European debt crisis unseating investor confidence in the financial market, worries that additional tension between North and South Korea might be one straw too many is gaining credence. However, it is not clear just how much of the Kospi’s recent descent is due to Europe’s sovereign debt crisis and how much can be attributed to Korea’s geopolitical risk.
Still, fundamentally speaking, nothing has changed - or that’s the view set forth by the South Korean government and many experts on the current Korean financial situation. South Korea’s A1 sovereign rating was announced by Moody’s Investors Service after the reports of Cheonan’s sinking surfaced, having factored in the recent geopolitical risk; on May 21, Moody’s confirmed that it would maintain its A1 credit rating for Korea.
In many industries, top executives have expressed dismay over the double threat of the European debt crisis and Korean geopolitical risk. “Many corporations have been caught off guard,” said a financial market insider. “The far-reaching effects of the European crisis and the deterioration of inter-Korean relations were variables never predicted by corporations earlier this year. Though as of now, these variables do not appear to be overly serious, close observation of further developments is called for.”
Major companies such as Samsung Group, Hyundai Motor, LG and SK Group say they are keeping a watchful eye over both variables. However, upon closer inspection, there are no signs of movement toward a change in corporate strategy or reduction of investment. This is attributed to the fact that even though markets in Europe are slowing down, the rise of consumption in America and China is more than making up for it.
“Even though prospects for the Europe market aren’t bright, we see much hope in the fact that consumption of some products in American markets has grown twofold.” said a Samsung Group spokesperson. “Even if European market consumption falls past the point of no return, there is only a slim chance that it will lead to a global market downturn.”
In the end, general consensus is of a distinctively hopeful tone. “Geopolitical risk will most likely remain high for the near future, given the uncertainties in how both Koreas will react,” said You Seung-min, an analyst at Samsung Securities, told Dow Jones. “But many seem to know what the final resolution will be - an action taken through the UN, not a military action by any means.”