South Korea Also Faces Economic Threats From Nuke Crisis

The robust South Korean economy traditionally shrugs off flare-ups with rival North Korea, such as a deadly naval clash last summer. But atomic weapons are a different matter.

Worries over North Korea's nuclear programs have now been branded this year's biggest hazard to the South's economy by the nation's central bank chief. The recent tensions are blamed as a contributor to everything from a tumbling stock market to hollowed-out foreign investment.

The economy is far from the downward spiral it took during the 1997-98 Asian financial crisis, but economists warn that investors could be spooked if Pyongyang adds to the two atom bombs it is believed to already possess.

"The nuclear issue is a burden on the economy," said Lee Sung-kwon, chief economist at Goodmorning Shinhan Securities in Seoul.

Clashes with the North are not uncommon on the Korean peninsula, which has been divided since 1945 and fought a three-year war in the 1950s, although they were more common in decades past.

Last June, a naval shootout killed six South Korean sailors, and a year earlier, communist and South Korean troops fired shots across the Demilitarized Zone separating the two sides. Financial markets usually react to such events with no more than a ripple.

But since revelations in October that North Korea has a secret atomic weapons project, even small confrontations along the border carry nuclear overtones.

Just last week, Bank of Korea chief Park Seung called it the biggest peril to the country's economy. If the threat of war were to escalate too far, the economy could shrink this year instead of growing at 5.7 percent as forecast by the central bank, he said.

Any disruption to peace would be a "significant blow" to foreign investment as well as exports and domestic consumption, Park said.

As the dispute intensified throughout December, Seoul's main stock index fell more than 13 percent from the month before -- and was down nearly 10 percent from last year. On Tuesday, it shed another 2.2 percent.

Analysts say stocks began to tail off months ago because of corporate-governance worries, but that the recent tumble is as much due to concerns about foreign investment and security.

Worries about deteriorating inter-Korean relations run especially deep for the hundreds of South Korean firms planning to locate factories in the North, some in a special economic zone to be set up with South Korean investment.

Those plans are jeopardized by the nuclear standoff, as evidenced by postponement of the Dec. 26 groundbreaking for the special economic zone.

The Seoul government now hopes to draw up agreements with the North later this month on investment guarantees for South Korean investors and assurances against double taxation, South Korea's Yonhap news agency reported Tuesday.

Foreign investors are also increasingly leery.

The South Korean Commerce Ministry said Tuesday that direct investment by foreigners dropped 64 percent in the fourth quarter, compared with the same period in 2001. A variety of factors have been cited, including overseas jitters about North Korea and Iraq, as well as global economic woes. It expects the decline to continue through the beginning of 2003.

The nuclear crisis may also undermine the economic agenda of incoming President Roh Moo-hyun, who takes office late next month. Burdened by new diplomatic pressures, he may have less focus on his much vaunted economic reforms, analysts say.

Still, many business leaders say worries are more a matter of perception than economic fundamentals, which still remain fairly bright.

The Finance Ministry expects exports to grow by 7.5 percent this year to a record $175 billion. That should help South Korea build up the foreign reserves to weather an outbreak of conflict -- even the anticipated oil shock of a possible war in the Middle East.

And the Bank of America Corp. contends in its latest regional outlook that the nuclear drama is unlikely to have any lasting damage on the recovering South Korean economy, barring occasional dips.

"For North Korea, provoking a war with the U.S. is suicidal and clearly not an option," it said. "Not even the brinkmanship of North Korea is likely to derail further recovery of regional economies."