How Tensions between North and South Korea are Impacting Investments

For years now, North Korea has been making heads of state nervous with its threats, exclusionist policies, and bouts of weapons testing — and none more so than South Korea. Their concerns have been magnified recently by a nuclear test in January and a satellite launch in February. The ostensible purpose of the latter is scientific, according to North Korean officials, but it is widely considered by other world leaders to be intended for missile guidance.

Unfortunately, the South Korean government has to deal with multiple repercussions of these tensions, and not just the obvious ones. The economy has also taken some rather dramatic hits due to the situation, and the country experienced a severe drop in growth at the end of 2015 and the beginning of this year. While there are several other factors at play here (lower oil prices for example), the impact of this potential conflict is reverberating throughout the market.

The Stock Market

One of the most obvious tolls that the situation has taken is on the stock market. Because South Korean and Asian investors have less confidence in the financial markets, the whole country’s economy suffers. Particularly, exports saw the largest drop in six years when they dove to 18.5% in January. Since exports make up about half of the GDP, South Korea has had to lower its projections for growth over the coming year — something that is unlikely to woo investors. South Korea is considering a stimulus and hoping to improve its performance, but many financial experts are skeptical, as a recent stimulus failed to prevent this outcome.

Foreign Manufacturers

Another effect that North Korea’s actions may have is to scare away those in business who have the ability to leave. Some foreign manufacturers with operations in South Korea have been keeping a careful eye on the state of affairs and making plans accordingly. A few years ago, for instance, the CEO of General Motors expressed concern about political tensions and claimed that he would move operations in order to safeguard production and workers if the situation warranted. If a number of companies pull out of the country, it will only damage the market there.

Economic Losses as a Form of Sabotage

There are some analysts who speculate that North Korea’s threats have an additional purpose: that is, to effectively damage the South Korean markets. After all, they’ve been intimating for years that they would make aggressive moves against their southern neighbors, but have yet to actually do so — and many South Koreans have become used to it. The one thing that these suggestions of violence have done, however, is to set the economy on edge.

According to Tom Coyner, author of Doing Business in Korea, North Korea is “now using the propaganda in an extreme form to try to damage foreign direct investments into South Korea.” This keeps South Korea worried on two fronts, which is undoubtedly pleasing to North Korea.

North Korea has made no attempt to conceal their enmity towards South Korea, but the effects of their hostilities could have an echo effect on not only their local markets, but those of Asia and the world as a whole. However, the country has had ups and downs before, so hopefully this is just another bump in the road.