Learning Effect
Despite North Korea’s missile provocation, the won-dollar exchange rate closed at 1,076.80 won on November 29, down 7.6 won from the previous day. This is because of learning effect. The South Korean economy now has a strong resilience against the “North Korea Risk” unlike the past.
The news came out that North Korea fired a long-range ballistic missile toward the East Sea again for the first time in 75 days at around 3:17 am on the 29th. However, the South Korean financial market remained stable unlike the past.
The Korean won climbed to more than two-and-a-half-year high and the main bourse index KOSPI continued to skyrocket on the eve of the last Monetary Policy Committee meeting this year. Experts said the South Korean financial market or real economy will not be hit unless the U.S. chooses a “military option.”
“I expect that North Korea’s provocations will not have a great impact on the domestic financial market,” said Deputy Prime Minister and Finance Minister Kim Dong-yeon in a meeting with economic-related ministers at Seoul Government Complex on the same day. “Despite multiple provocations from North Korea, the South Korean financial market and credit rating have remained stable.”
In fact, Pyongyang’s long-range missile launch earlier in the day had the least impact on the South Korean financial market. The Korean won rather jumped to its highest in 2 years and seven months. On the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,076.8 won on November 29, down 7.6 won from the previous day. It was the lowest closing price since 1,068.6 won on April 29, 2015. On the stock market, the KOSPI fell a mere 0.05 percent from the previous trading day, while the secondary KOSDAQ rather rose 1.11 percent. This is in stark contrast to the situation when North Korea's military provocations occurred in the past.
When the news came out that North Korea carried out the sixth nuclear test on September 4, the domestic financial market became frozen. The KOSPI dropped 1.19 percent from the previous day, while the won-dollar exchange rate increased 10.20 won. The interest rate of a three-year treasury bond was on the rise as well.
However, these are now a thing of the past. It is well shown with the trend for credit default swap (CDS) premiums, an indicator of sovereign default. The CDS premiums of a five-year government bond decreased from 59 basis points to 58 basis points on the same day. One basis point is equivalent to 0.01 percent. The CDS premium is a dishonored premium for foreign currency denominated government bond issued by the South Korean government in foreign countries.
This is why there is an advice from a CEO at an asset management company in the Yeouido Stock Street that the fall in stock prices due to the North Korea risk should be considered an opportunity for buying. Accordingly, foreign media expressed concerns over South Korea’s sense of excessive relief. Bloomberg said, “It is good to see the financial market remain stable regardless of North Korea provocations but it is worrying that the country may feel excessively relieved with the issue. Market experts said the stronger resilience of the South Korean economy is largely due to its learning effects.
Hong Joon-pyo, a senior analyst at Hyundai Research Institute, said, “There will be no chaos because of learning effects.” However, many said the South Korean economy can be greatly affected by how the U.S. responds to the issue. Professor Kim Jeong-sik of Yonsei University said, “If the U.S. takes this issue seriously and takes military action, the nation’s credit rating will be adversely affected and in crisis. However, the economy will not be hard hit when the U.S. only imposes economic sanctions against North Korea just like now.”