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Economic repercussions from nuclear test may be worst in N. Korea(Turkish Daily News Via Thomson Dialog NewsEdge) North Korea's claim that it conducted a nuclear test Monday raised political risks a notch higher for businesses in the region, and markets slid southward accordingly. But the biggest threat may be to North Korea itself, an impoverished, isolated country heavily dependent on aid from China. The South Korean government held an emergency meeting of top officials, including the governor of the Bank of Korea and the finance minister, to discuss how the test might affect the local economy. More than a half-century after the end of the 1950-53 Korean War, the North remains an enduring source of tension and unpredictability for the region -- though its economic dealings with the rest of the world are limited. Regional markets were rattled, with Seoul's benchmark Korea Composite Stock Price Index (KOSPI) initially dropping 3.6 percent after the test was announced. Foreign buying later erased some of those losses, and it closed down 2.4 percent. Share prices also fell in Hong Kong, Sydney, Singapore and elsewhere, though Asia's biggest market, Tokyo, was closed for a national holiday. "Trade is expected to stay volatile this week," said Hong Soon-pyo, a Hanyang Securities analyst. The won and other regional currencies fell against the U.S. dollar, usually treated as a safe haven in times of uncertainty. "We see some reflex reaction in the markets, and a flight to the dollar," said David L. Cohen, director of Asian Economic Forecasting at Action Economics in Singapore. But the longer term economic impact of the North's claimed nuclear test will depend largely on the reactions of its neighbors, especially longtime ally China, he said. "Assuming the situation doesn't degenerate into a military conflict the direct economic consequences will be limited," Cohen said. Although the impact of the test could be severe, the event will not necessarily lead to a revision in South Korea's sovereign credit ratings, Standard & Poor's Ratings Services said in a report issued Monday. "This is because the prospects of a nuclear test leading to economic sanctions severe enough to hasten a collapse of the North Korean regime, or worse, spark a full-scale military conflict, are still remote," wrote Standard & Poor's analyst Takahira Ogawa. Reliable statistics on North Korea's economy are scarce, but the U.S. Central Intelligence Agency (CIA) estimates the country's gross domestic product in 2005 was $40 billion, compared with South Korea's GDP of roughly $800 billion. China, which fought on the North's side during the Korean War, is Pyongyang's main source of food and fuel aid. The communist North has been suffering from power and food shortages since the mid-1990s, when natural disasters and mismanagement devastated its economy and led to a famine believed to have killed some 2 million people. Heavy flooding this summer deepened the food crisis. Pyongyang has refused to return to multination disarmament talks, sponsored by China, because of U.S. financial restrictions imposed for alleged illegal activities, including money laundering and counterfeiting. So far, Beijing has resisted intense U.S. pressure to use its economic leverage to get Pyongyang to return to the talks out of fears the regime might collapse, upsetting the region's military balance. China's response Monday to the nuclear test lacked the usual conciliatory tone, chastising the North for defying the "universal opposition of international society" and demanding it refrain from further provocations. But the brief statement posted on the Foreign Ministry's Web site made no mention of possible Chinese sanctions. The North's move could also lead to U.N. Security Council action or new sanctions by other countries including the United States and Japan. The nuclear test likely took North Korea a step toward even greater economic isolation. Tokyo has been looking at ways to step up unilateral sanctions by hampering trade and financial restrictions, Japanese media have reported, in addition to earlier moves to freeze fund transfers to entities linked to the North's missile and weapons programs Copyright 2006 Turkish Daily News. Source: Financial Times Information Limited - Middle East Intelligence Wire. |