Geopolitical Tensions Weigh on Economy

Heightening geopolitical tension on the Korean Peninsula are casting a shadow over the already weak economy, and will make it harder for the government to achieve its growth target for this year, analysts said Friday.

They expressed concern that it could also hurt Korea's sovereign credit rating and damage exports to China.

"As the government says, businesses in the Gaeseong Industrial Complex (GIC) make up a tiny part of Korea's gross domestic product (GDP). However, if the current situation continues, there could be an additional exodus of foreign funds from Korea's capital market," said Park Sang-hyun, chief economist at Hi Investment and Securities.

Park said that escalating military tension could work negatively on the nation's sovereign credit rating as well

The government has said that economic losses from the closure of the GIC will be negligible, as its annual $500 million output is only 0.04 percent of GDP.

However, Hong Soon-jick, a senior researcher at the Hyundai Research Institute, pointed out that the geopolitical issue comes at a time when the economy is already in trouble.

"Previously, issues such as North's nuclear tests or the conflict between South and North Korea lasted only two or three days, or 10 days at the longest. But it is different this time," he said.

He and other analysts said geopolitical risks will worsen consumer and investor sentiment. They said weaker stock prices and the swooning real estate market will add further downward pressure on consumer spending.

The issue is more complicatedly linked with the economy as it is likely to affect South Korea's trade with its biggest trading partner, China.

The United States and Korea are to set up Lockheed Martin's terminal high altitude area defense (THAAD) system on the peninsula to counter any provocative moves by North Korea, but China regards it as a threat. This has ignited concern that China could take retaliatory economic measures.

The government, however, appears undeterred, with Strategy and Finance Minister Yoo Il-ho...