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FACTBOX-Five political risks to watch in South Korea
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FACTBOX-Five political risks to watch in South Korea
Reuters - Tuesday, December 15
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SEOUL, Dec 15 - Besides the threat posed by the unpredictable regime of North Korean leader Kim Jong-il, South Korean investors face risks from the country's volatile politics, with policymaking often stalled due to political disputes.
Following is a summary of key South Korea risks to watch:
* THE NORTH
North Korea's second nuclear test in May and always unpredictable behaviour have raised tensions on the peninsula. The greatest risk to regional economies would be a brief but intense military conflict -- North Korea could lob tens of thousands of artillery rounds into the Seoul region that is home to about half of South Korea's population, and fire hundreds of missiles at major cities in South Korea and Japan. Such an attack might take less than an hour but would do severe economic damage. It would also mean suicide for the North's leaders who would be hit by a U.S.-led counterattack. Another key risk is that the sudden implosion of the North Korean regime leads to a difficult reunification process that undermines the South Korean economy. [ID:nSP522703]
Key issues to watch:
-- Aftermath of the visit of U.S. envoy Stephen Bosworth to North Korea. Pyongyang has indicated it is ready to end its year-long boycott of nuclear negotiations, but may not go as far as making the serious steps to eliminate its nuclear arms infrastructure that would greatly decrease the threat it poses.
-- The Obama administration could put North Korea on the back burner while it tries to manage the wars in Afghanistan and Iraq as well as its domestic agenda that includes contentious health care legislation. North Korea does not like to be ignored and could try to grab attention with military moves such as missile launches, sparking a skirmish with the South or even another nuclear test. All of these moves would dampen sentiment in financial markets by underscoring the risks to investors.
-- Clues on the stability of the North Korean regime. South Korean assets would dive if it seemed North Korea was set to implode and reunification was likely. The North's decision to revalue its currency could spark rare internal protests.
* GOVERNMENT EFFECTIVENESS
After suffering a collapse in his popularity upon taking office, President Lee Myung-bak has seen a surge in his support as South Korea's economy posted strong growth figures in the third quarter and the country seems to be among the first major economies to emerge from the global economic downturn. Lee's business-friendly reform agenda looks set for further delays in a parliament session that ends at the end of the year that will be dominated by debate over the budget and a contentious plan he backs to spend about $20 billion restoring four major rivers.
Lee is also likely to face continued difficulties maintaining support even within his own party -- several figures are jockeying for prominence as they eye a run for presidency when his single, five-year term expires in 2013. A parliament described by local media as dysfunctional has stymied many of the economic reforms proposed by Lee to make the economy more competitive and open to foreign investment. The inflexible bureaucracy adds to policy delays and inefficiency.
Key issues to watch:
-- A significant change in government effectiveness would impact investor perceptions. Most of the risk may be on the upside, as markets have priced in a fairly high degree of government inefficiency and policy delays. Lee's support rating has been on the rise in recent weeks, which might better the chances for reforms proposed by Lee to make their way through parliament, including a law that doubles the term companies can hire contract workers to four years.
* ECONOMIC REFORM
The economy remains dominated by large chaebol conglomerates, and highly dependent on exports. The government's interventionist attitude to the economy often comes at the expense of longer-term reforms. Foreign investors often encounter informal barriers to entry, and the government has not shown any particular desire to strongly encourage foreign capital. [ID:nSEO314453]
Key issues to watch:
-- Progress, or lack thereof, in passing the delayed economic reforms promised by Lee but yet to be implemented.
* CORRUPTION
Transparency and corruption remain an issue in South Korea, and the suicide of former President Roh Moo-hyun while he was under investigation for graft focused more attention on this divisive subject. But for foreign investors, the biggest threat is the hidden barriers rather than corruption which is seen as less of a problem than in many regional countries.
Key issues to watch:
-- South Korea's rank in global corruption perceptions indices -- signs it was slipping back in the rankings could impact investor decisions.
-- Any return of strong nationalist criticism of foreign company profits.
* TRADE
The government is trying to press ahead with free trade deals, which once were hotly contested but now have gained greater public support. The country fiercely protects its farmers and has numerous non-trade barriers that block the entry of foreign goods and are often stumbling blocks in trade talks.
Key issues to watch:
-- The government's success in agreeing more bilateral free trade agreements -- and getting them passed by parliament. In October, South Korea and the EU signed off on a free trade deal that could be worth potentially $149 billion to both economies. The agreement increases the focus on a bilateral deal South Korea has with the United States reached more than two years ago but has since stalled in the legislatures of both countries.
-- Progress of the South Korea-U.S. FTA, which was agreed more than two years ago but has yet to be approved by legislatures in either country. U.S. President Barack Obama said he would like to see the deal approved next year, but his government has said provisions including the auto trade sector may have to be reworked.
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