Tensions Over North Korea Rattle the South's Economy and Its Foreign Investors

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SEOUL, South Korea -- Threats by North Korea and displays of military resolve by South Korea and the United States have begun to unsettle foreign investors' confidence in the South, creating a secondary layer of worries for Seoul and Washington.

South Korea's main stock index began slipping Monday and closed Friday at its lowest point since November. On Thursday, General Motors said that it was making contingency plans for employee safety at its South Korean plants and that further increases in tensions would prompt it to consider moving production elsewhere.

The Philippines and Thailand, which have thousands of citizens living in South Korea, said they were drawing up evacuation plans in case the situation worsened.

"In the past, North Korea-related events had little impact, or the markets recovered quickly," the South Korean vice finance minister, Choo Kyung-ho, said at a meeting of top finance officials on Friday. "But recent threats from North Korea are stronger, and the impact may therefore not disappear quickly."

Financial jitters could worsen if the North continues to block South Korean workers and supplies from entering a joint industrial park in the North Korean town of Kaesong. The blockade, which entered its fourth day on Saturday -- the longest that South Koreans have been shut out of the complex -- was fast drying up materials for 123 South Korean factories there, forcing four of them to stop production.

The park, where the South Korean factories employ low-cost North Korean workers, has been a major source of hard currency for the North. But until last week, it had also been the last major symbol of inter-Korean cooperation, one that South Koreans cited to calm investors.

Its survival despite years of political tensions, South Koreans said, indicated that North Korea's bellicose language was not always matched by its actions. A total closing of the complex would further damage investors' confidence and increase political pressure on the South Korean president, Park Geun-hye.

The developments come as South Korea and the United States were engaged a delicate diplomatic balancing act. On one hand, they were trying to show the North's youthful leader, Kim Jong-un, that they would not be blackmailed by his bluster, breaking with a history in which the North threatens and the allies offer negotiations or aid to calm tensions. But at the same time, the allies do not want to escalate the tensions so much that they lead to military hostilities or damage South Korea's economy.

Although many South Koreans have grown inured to decades of periodic threats from North Korea, they worry that in any prolonged confrontation their globalized economy would have more to lose than the one in the North, which is battered and isolated and hurt by international sanctions.

"The North Koreans are now using the propaganda in an extreme form to try to damage foreign direct investments into South Korea," said Thomas L. Coyner, a member of the American Chamber of Commerce in Korea and the author of "Doing Business in Korea." "They are, in a sense at this point, winning in an asymmetrical psychological warfare, attacking the economic strength of South Korea."

John Delury, an American who teaches at Yonsei University in Seoul, said that the economic impact of the conflict posed a "serious challenge" to President Park, who was elected on promises to bolster the economy and build trust with the North.

"The relentless show of force on a daily basis by not just North Korea but also the U.S. and South Korea as part of their annual military exercises has captured the attention of the world, and made the Korean Peninsula a place associated not with 'Gangnam Style' but with nuclear weapons and stealth bombers," Mr. Delury said.

And even though many analysts and diplomats believe the North will not follow through on its most dangerous threats -- pre-emptive strikes against the United States and South Korea -- he noted that the continuing alarm could still cause problems.

"Markets hate risk, even if it is the perception rather than reality of risk," Mr. Delury added.

South Korea's economy has suffered far worse disruptions, most recently during a global financial meltdown in 2008, and proved resilient. But the conflict is an additional drag on the economy at an inopportune time.

The once-supercharged economy took a blow in 2011, during the global financial downturn, when the growth rate dropped to 3.6 percent from 6.2 percent in 2010. It has since slowed further, in part because of China's increasing power as an exporter and, more recently, as the weakened Japanese yen allowed Japan's exports to better compete with South Korea's. The government revised its growth forecast for this year to 2.3 percent from 3 percent.

In a report on Friday, Citi Research said that "barring an outbreak of wide-scale military conflict, we think North Korean brinkmanship will not impact the South Korean economic fundamentals." Thomas J. Byrne and Steffen Dyck at Moody's Investors Service expressed similar views last week, but also warned of "a heightened risk of military adventurism or miscalculation by the 30-something Kim Jong-un."

Han Beom-ho, an analyst at Shinhan Investment, said that markets had traditionally tended to dismiss North Korean threats.

But this time, "the targets of North Korean threat have expanded and the international community has become more sensitive," he said, referring to the North's growing nuclear and missile capabilities and American plans to deploy more interceptor missiles to the region. "At the same time, there is doubt over the abilities of those who are supposed to deter North Korea, especially China."

South Korean officials and analysts suspect that North Korea, no longer able to fight a conventional war or even start a major skirmish with the South without suffering a devastating counterstrike, is increasingly resorting to other forms of warfare, like hacking the computer networks of South Korean banks and broadcasters.

"Most people say they are used to a lot of blustering and posturing by North Korea and we should not take it too seriously -- but it needs to be taken seriously in the sense that it is already proving to be effective," said Mr. Coyner of the American Chamber of Commerce in Korea. "It's a very interesting, sophisticated economic attack on South Korea."

world

This article originally appeared in The New York Times.


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