SINGAPORE (ICIS)--South Korea's economy could be weighed heavily by the heightened tension over North Korea's nuclear weapons programme but the risk of an outright conflict though rising is still low, Fitch Ratings said on Monday.
“The North Korean issues are long-standing and have shown a cyclical pattern for many years, and occasional escalations have not been uncommon,” it said in a statement.
Fitch believes that outright remains unlikely as the North and South have too much to lose in attacking one another, given the devastation and likely downfall of the North Korean regime that would result.
“That said, tensions are higher than they have been for many years, and the strategic balance is changing,” the ratings firm said.
North Korea continues to strengthen its ability to reach US territory with nuclear weapons, which has raised the possibility of a preemptive strike on the North by the US, Fitch said.
There is also a risk that confrontation could be triggered by an unexpected event or miscalculation on either side, it said.
“Conflict could have a dramatic impact on South Korea's economy and might also be highly disruptive to international financial flows and global trade, given South Korea's importance as a major producer of electronic and automotive components,” it added.
Even without military conflict, further escalation of tensions could have an economic impact on South Korea, Fitch said.
“The end of a long period of domestic political uncertainty and a recovery in electronics exports pushed real GDP growth up to 2.8% year on year in the first half of 2017, but this positive momentum might be halted if friction with the North undermines business and consumer sentiment,” it said.
Disputes with China over South Korea's Terminal High Altitude Area Defence (THAAD) anti-ballistic missile system have already had a negative impact on the South through a drop in tourism inflows from China and lower exports of consumer products, such as cars, to China, according to Fitch.
Tensions also have the potential for global spillovers, such as the risk of a deterioration in trade relations between the US and countries that trade with North Korea, it said.
The US is China's largest export market, accounting for almost one-fifth of its shipment, Fitch said.
“Disruption to trade between the US and China could also have consequences across the rest of the Asia-Pacific, given the linkages embedded in regional supply chains,” it added.