The historic first meeting between South Korea's President Moon Jae-in and his North Korean counterpart Kim Jong-un on Friday is expected to ease geopolitical risks and stimulate new economic momentum that will benefit Asia's fourth-largest economy going forward.
The country expanded 3.1 percent in 2017 on the back of recovering global trade and rising demand, up slightly from 2.9 percent growth in the previous year.
But intensifying military tensions surrounding the Korean Peninsula weighed on the economy throughout last year, exacerbated by North Korea's missile launches and nuclear tests.
(Yonhap)
Also, a diplomatic rift with China over the deployment of the U.S. defense shield Terminal High Altitude Area Defense (THAAD), which was officially aimed at defending the South's territory against the North's missile attacks, weighed down economic growth.
China's retaliatory actions damaged South Korea's economic dealings with its No. 1 trading partner. Previously popular South Korean products and entertainers were boycotted and faced restrictions in China. The standoff over THAAD caused a sharp drop in moneyed Chinese tourists coming to South Korea as Beijing banned the sale of group tours to the country.
Global ratings agencies assessed that geopolitical risks on the Korean Peninsula are easing following improved relations between South and North Korea. The risks have been one of the biggest drags on economy, which has been showing sluggish growth.
Earlier this week, South Korea's Finance Minister Kim Dong-yeon held a series of meetings with senior officials from S&P, Moody's and Fitch in Washington on the sidelines of a Group of 20 finance ministers and central governors meeting.
Kim expressed hope that the recent improvement in inter-Korean relations would be factored into the rating assessment.
In response, the ratings appraisers said they would keep close tabs on developments involving the two Koreas and determined that the South Korean economy is on a firm growth track.
Reflecting such developments, the Seoul government sees tangible breakthroughs from the summit likely exerting positive influence on the country's sovereign rating.
Currently, Moody's rates South Korea's sovereign rating "Aa2," the third-highest grade in the company's table, and S&P also awards a No. 3 "AA" rating. Fitch gives Seoul an "AA-" rating, the fourth-highest.
"Leading ratings firms like S&P and Moody's point out North Korean risks that keep them from raising South Korea's sovereign rating further," a government official who requested anonymity said. "If the South-North meeting produces substantial results, there is a good chance such developments will be factored into the country's sovereign rating in the future."
Moody's will release its conclusion on South Korea's sovereign rating within three months, with S&P and Fitch scheduled to have annual meetings later this year.
Moreover, the peaceful atmosphere will improve consumer sentiment and attract more foreign investment, resulting in more growth.
"The improved inter-Korean relations will likely speed up the growth pace and fuel growth momentum," Deputy Gov. of the BOK Huh Jun-ho said in a briefing on Thursday. "But it's difficult to remove all risks with one summit meeting. I think future developments will be more important." (Yonhap)