The dispute over North Korea's nuclear ambitions has hit the South Korean economy Tuesday as Moody's credit ratings agency downgraded its outlook for the country's economy from "positive" to "negative." The move could make it harder for South Korean companies to borrow money.
Moody's Investors Service cut South Korea's sovereign debt outlook by two notches to a negative rating from positive. South Korea's long-term credit rating reamains unchanged at A-3.
Moody's says "increased uncertainty regarding North Korean actions" make it unlikely that South Korea's ratings could improve soon. It also said recent North Korean actions are "more provocative" than Pyongyang's behavior and threats in the past.
Tensions on the Korean Peninsula have escalated during the past four months, after Washington said Pyongyang was violating a 1994 agreement to halt its efforts to develop nuclear weapons.
North Korea has since moved to reactivate an idled nuclear plant in Yongbyon and kicked out international nuclear monitors.
Moody's upgraded South Korea's outlook from positive to stable just last November - a move some analysts say did not properly take into account the risks on the Korean Peninsula.
"We have already incorporated a geopolitical risk from North Korea, not so much a war, but if their regime was to collapse, the potential cost to South Korea to help stabilize that," said Dilip Shahani, a market analyst with investment bank HSBC. "We were surprised by the original move when they [Moody's] upgraded it on November 15."
South Korea has one of the largest economies in the world, and its population is more than double North Korea's, which is one of the world's poorest countries and suffers from shortages of both food and fuel.
Moody's also changed the outlook to negative for five South Korean banks. Mr. Shahani say the negative rating means South Korean companies may have to pay higher interest rates when they borrow overseas. "Moody's has decided to move this one down so the cost of funds for all of these banks will moderately go up. It will dampen investor enthusiasm in the short run," he said.
Seoul's benchmark Kospi index, already at 15-month lows, ended little changed at 576. The downgrade put pressure on South Korea's currency. The won fell 1.6 percent against the dollar.