In its report “Sovereigns — Global, Vietnam and Japan most exposed to credit impact of a potential Korean conflict” issued on Tuesday, it said uncertainty over the potential for military conflict on the Korean peninsula is rising with the increasingly strident rhetoric.
“A conflict would have a high credit impact on Korea (Aa2 stable). Aside from Korea, Japan (A1 stable) and Vietnam (B1 positive) are the most exposed sovereigns,” it said.
Moody’s said among the major potential protagonists, the broader implications for the US (Aaa stable) and China (A1 stable) would be relatively limited.
For the US, a sharp lift in military spending would add to and bring forward fiscal pressure, weighing on its fiscal metrics. By contrast, Japan’s growth would likely slow markedly and this would jeopardise a durable stabilisation in government debt.
With Vietnam, the loss of exports to South Korea and supply chain disruptions would weaken the Southeast Asian sovereign’s credit profile.
“With an already elevated debt burden (52.6% of GDP in 2016), the Vietnamese government may not have the space to buffer the economic shock without a material weakening of fiscal strength,” it said.
In the report, Moody’s focuses on the credit implications of a broad and protracted conflict. In the case of a short and contained event, the effects for global sovereigns would likely be limited.
The report considers the credit impacts of a major conflict on sovereigns other than Korea through the economic effects of lower exports to Korea, disrupted global chains, the economic and fiscal impacts of prolonged lower LNG and oil prices, and liquidity pressures due to refinancing difficulties in turbulent financial markets. It follows previous analysis of the implications of a conflict for Korea’s credit profile.
Among other sovereigns, the credit implications of a major conflict would be more limited for Singapore (Aaa stable), Hong Kong (Aa2 stable) and Taiwan (Aa3 stable). In particular, these governments have fiscal space to buffer weaker exports to Korea.
The impact on Korean and global growth of a conflict would put downward pressure on energy demand.
In particular, South Korea is the second-largest importer of LNG globally. If LNG and oil prices were to fall on a sustained basis as a result, pressure on sovereign producers and exporters of these commodities would rise.
Meanwhile, if a Korean conflict led to sustained capital flows away from higher-risk emerging markets, external vulnerability and liquidity risk would increase. Which sovereigns were affected would depend on the timing of the conflict and when debt maturities were falling due.
In this respect, Mongolia’s (Caa1 stable) credit profile could be impaired by global financial market turmoil if financial markets seize up at a time when refinancing needs are pressing. Two large international sovereign bond repayments are due in early and mid-2018.
“Without market access, Mongolia’s ability to repay foreign debt would be very limited given its small reserves,” it said.