North Korea's decision to halt nuclear tests is expected to ease uncertainties related to geopolitical risks in the South Korean economy, market watchers said Saturday.
Pyongyang's state media said it will stop nuclear and missile tests and dismantle its nuclear test site in a shift of policy focus to the economy. The announcement came ahead of North Korea's summits with South Korea and the United States.
The move boosted hopes among local investors about easing of tensions on the Korean Peninsula, which have been cited as a key reason for undervalued local stocks over the past decades, dubbed the "Korea Discount."
Experts say the mood of detente could improve South Korea's ratings outlook by alleviating so-called "North Korea risks," such as possibilities of a war on the Korean Peninsula and abrupt change in the Pyongyang regime.
"(North Korea's denuclearization pledge) could have a positive impact on the South Korean economy as lower military tension is a stabilizing factor in politics and security," Kim Jung-sik, an economics professor at Yonsei University, said. "It could provide an opportunity to ease 'Korea Discount' and promote foreign investment here."
In November, Moody's Investors Service reaffirmed its record-high Aa2 rating for South Korea, but cited possibilities of North Korean provocations as downside risks for Asia's fourth-largest economy.
Another rating agency, Fitch, maintained its rating for South Korea at AA1, noting the North Korea risk exacerbating investor sentiment that could drag down the stock market and weaken the local currency's value.
North Korean leader Kim Jong-un's shift of national focus to reviving the moribund economy could also provide big opportunities in infrastructure and other businesses potentially involved in joint projects, including the shuttered joint industrial complex in Kaesong in the North.
Seoul shut down the Kaesong Industrial Complex in February 2016 in response to Pyongyang's nuclear test and long-range rocket launch, forcing more than 120 South Korean businessmen to leave behind their factories in the North Korean border city.
Local observers raised cautious optimism that North Korea's summits with South Korea and the United States may lead to the easing of international sanctions, which block the inter-Korean business projects, in return for North's dismantlement of its nuclear program.
"The Kaesong Industrial Complex is likely to resume operations following the inter-Korean summit as it is the symbol of inter-Korean exchanges, reconciliation and peace," Lim Eul Chul, a professor at the Institute for Far Eastern Studies at Kyungnam University, said. "North Korea's announcement of ceasing nuclear tests signals an early resumption of the Kaesong complex."
The complex, located some 50 kilometers northwest of Seoul, had served as a major revenue source for the cash-strapped North since opening in 2004. More than 54,000 North Korean workers produced labor-intensive goods, such as clothes and utensils. (Yonhap)