Nuke test`s impact limited on S.Korea`s financial markets

South Korea`s main stock index posted a daily fluctuation of 15.02 points on Tuesday North Korea`s nuclear test, lower than 26.05 points, which was recorded Friday ahead of the Lunar New Year`s holidays. The foreign exchange market also remained stable despite the test.

North Korea proceeded with its test despite warnings from the United Nations, but the act had no substantial impact on South Korean financial markets since they have grown immune to risks from the Stalinist country.

○ Foreigners buy shares

After fluctuating slightly in the morning, the benchmark stock index KOSPI fell 7.27 points (0.37 percent) from Monday to 1,943.63 at 12:30 p.m. immediately after news spread of the nuclear test. The drop was the biggest in the day but the index closed at 1,945.79, down just 5.11 points (0.26 percent) from the previous session. Foreign investors net purchased 135.3 billion won (124 U.S. million dollars) on the main stock exchange, the highest volume since 174 billion won (159 million dollars) bought on Jan. 2.

The tech-heavy KODSAQ, which is more vulnerable to external shocks, fell 0.69 percent to 501.48 at one point, but closed the day down 0.24 percent at 503.72. Performance was mixed on the KOSDAQ, with shares related to inter-Korean business falling while those connected to war rose.

The South Korean won appreciated despite heightened tension over the nuclear test, going from 1,098.1 in morning trading to 1,095.9 after news of the test broke. The closing rate was 1,090.8, down 4.9 points from the previous day.

Financial industry sources said the North`s nuclear test will likely have limited impact on the South Korean economy. Cho Yoon-nam, head of research at Daeshin Securities, said, "The previous impacts of North Korea risk were short-termed and limited. Barring an extreme situation, I believe the North`s provocations cannot no longer impact economic fundamentals (of South Korea)." When Pyongyang conducted its first nuclear test on Oct. 9, 2006, the KOSPI fell 2.4 percent and the won depreciated, but the former recovered to its prior level in a week and the latter within two weeks. After the second nuclear test on May 25, 2009, South Korea`s shares declined for three days after rebounding to their normal level.

○ Companies urge prompt response by Seoul

Businesses denounced the nuclear test and urged an active response by the South Korean government. Seoul held an emergency meeting and monitored financial market movements, and was relieved as markets remained relatively stable.

Business organizations also denounced the North`s provocations. The Federation of (South) Korean Industries blasted Pyongyang for proceeding with the test despite repeated warnings from both Seoul and the world. It called the North`s latest provocation "an intolerable action threatening global peace and stability in East Asia."

The Korea International Trade Association in Seoul urged the United Nations Security Council to take action so that North Korea realizes that it will face stronger sanctions and isolation if it makes no effort to cooperate with the international community. The (South) Korea Federation of Small and Medium Business asked the South Korean government to ensure that smaller companies operating in the Kaesong Industrial Complex in the North, a symbol of inter-Korean economic cooperation, can stick to production activities without being swayed.

The complex began as a pilot project in 2004, and now has 123 companies operating factories there. Last year, it had 786 South Koreans working there, most of whom returned to South Korea for the Lunar New Year`s holidays. An estimated 163 remained there as of Tuesday.

Companies operating there say they are worried over the potential impact of the nuclear test but expected no immediate setbacks in production. A staff at a clothing company that began operations there in 2004 said, "Our operations in Kaesong weren`t disrupted when the North conducted its first and second nuclear tests or sank the (South Korean naval vessel) Cheonan. Moving output within the complex was also not a problem. We hope our government makes proper responses this time, too."

Hyundai Asan Corp., a South Korean company that runs tours to the North for South Koreans, is also fearful of a snag in the proposed resumption of package trips to Mount Kumgang, which were suspended in July 2008, after the Feb. 25 launch of the Park Geun-hye administration in Seoul. A company source said, "We had expected that North Korea would conduct a nuclear test, but we`re still worried over a worsening of the situation."

Also in South Korea, the Strategy and Finance Ministry, the Financial Services Commission, Bank of Korea and the Financial Supervisory Service held an emergency meeting immediately after hearing of the nuclear test. They downplayed the possibility of the test affecting South Korea`s real economy or sovereign credit ratings as slim, but decided to devise scenario-based responses if geopolitical risks rise.

nuk@donga.com