December 19th, 2011
04:29 PM GMT
London (CNN) – Asian markets fell on news of North Korean leader Kim Jong Il’s death, but analysts and ratings agencies say the ongoing economic impact will depend in part on the ease at which power is transferred to his youngest son, Kim Jong Un.
In contrast to Asian stocks, those in Europe and the U.S. were unmoved by the death of North Korea’s self-titled “Dear Leader,” as the rapid naming of his successor appeared to alleviate some fears of a power vacuum.
However, concerns the Korean peninsula would be destabilized by Kim's death prompted ratings agencies Standard & Poor’s and Fitch Ratings to warn the sovereign rating of North Korea’s neighboring South Korea would come under scrutiny.
It also reinvigorated debate around whether the North Korean regime could collapse, and the peninsula be reunified.
South Korea remains technically at war with North Korea, following the conflict between the two countries in the 1950s. The two nations never signed a peace treaty and remain separated by a tense demilitarized zone.
While the failing health of Kim was known, there is little information about his son and anointed successor Kim Jong Un, who is in his late 20s and has been groomed for the job since his father suffered a stroke around three years ago.
Kim’s death from a heart attack - which state media reported as being due to “overwork” - was therefore not unexpected, but the shift in power prompted Seoul to put South Korean forces on high alert while Pyongyang urged an increase in its "military capability."
But the immediate economic impact of Kim’s death on South Korea is likely to be limited, according to Goohoon Kwon of Goldman Sachs. “The South Korean government has a contingency plan, entailing counter measures ranging from intensive monitoring to market interventions and possible support from allies and international financial institutions,” he wrote in a note.
The South’s economic relationship with North Korea is “very limited,” he added. Bilateral trade is relatively stagnant and is currently worth about $1 billion. North Korea’s main economic partner is China, which supplies at least 80% of its oil, and significant amounts of its food, fertilizer and military aid.
Kim’s demise has prompted discussion around the chances of reunification between the two Koreas, although such an outcome is regarded as unlikely.
According to Royal Bank of Scotland analyst Erik Lueth, a “big bang unification comparable to the German model is not an option for Korea,” in part due to the cost.
Lueth flags “long-term association” between the two Koreas as a “much more realistic scenario” and “the option favoured by Seoul.”
Kwon has a similar stance, noting the strong political consensus in South Korea against a German-style reunification. “An alternative scenario, which is fairly unlikely now, is a rapid and subsidy-based unification, which would be prohibitively expensive in Korea due to the large gaps in the living standards and relatively small gap in population,” Kwon wrote.
“The third scenario, of which the odds are substantial, is the status quo,” he added.
Meanwhile both Fitch and Standard & Poor’s say they will be keeping tabs on South Korea’s rating - sitting at A+ and A respectively – and the impact of ongoing security risks in the region.
Standard & Poor’s said “security risks and political stability in North Korea could deteriorate rapidly if political succession is not smooth.” According to Fitch, “it is too early to say how the situation will evolve," but "political developments demand close attention.”
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