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S&P warns of N. Korea failure
SEOUL, South Korea (Reuters) -- South Korea should boost financial preparations for an economic failure of communist North Korea, the credit rating agency Standard & Poor's says. S&P, whose views are important as they influence the interest rate South Korea pays on its loans, also said Monday it was closely watching for any effect on South Korea's economic reforms from plans by President Roh Moo-hyun for a referendum on his rule. A meltdown of North Korea's economy, which is dead in all but name, could cost South Korea much more than its financial sector collapse did in 1997 and could lead to a downgrade in South Korea's ratings, S&P said in a statement in Seoul. "Although some other Asian nations that used to have centrally planned economies have successfully moved to a market-based system, the North Korean leadership probably lacks the flexibility and the vision to undertake such a change," it said. The government in Pyongyang has had limited success in tinkering with price reforms in an isolated country of 23 million people wracked with dire food and energy shortages.
"Unless South Korea has substantially built up fiscal reserves in the meantime, its ratings would fall from their current level upon sudden reunification of the peninsula." S&P puts South Korea, Asia's fourth-largest economy, in the same group as Malaysia, Hungary and Israel, by assigning an A-minus rating for the country's long-term foreign currency debt. President Roh shocked the country when he proposed an unprecedented referendum next month on his rule, after a close aide was arrested for taking bribes. S&P said it was watching to see whether the political uncertainty over the proposed vote, which is opposed by most lawmakers in South Korea's parliament, would affect private-and public-sector economic reforms. "Standard & Poor's will be watching closely how the current political developments affect the government's capacity to undertake these reforms," the ratings agency said. Touching on the North Korean nuclear crisis, S&P said that, even if multilateral talks produced an agreement, it would take time to see whether this was upheld any better than the defunct Agreed Framework of 1994 between Pyongyang and Washington. The present dispute erupted a year ago when Washington said North Korea had admitted to a nuclear weapons program and Pyongyang then pulled out of the nuclear Non-Proliferation Treaty. Talks in August failed to resolve the row. North Korea has agreed in principle to a new round of discussions and these could start next month. On economic reforms, S&P referred to the need for conglomerates to concentrate on key competencies, for improved corporate governance, lowering the state's participation in banking and making the government's budget more transparent. It also said building large foreign exchange reserves -- South Korea has $141.5 billion at the end of September -- had a downside because the central bank had to issue securities to mop up its intervention. "South Korea would be better served in improving efficiencies in its own economy to obtain competitiveness with foreign trading partners than in building a high level of international reserves to counter won appreciation," it said. South Korea's reserves are enough to cover nearly nine months of the country's imports, although currency dealers in Seoul have said South Korea often bought dollars when the U.S. currency fell against the won. Copyright 2003 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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