Announcement: Moody's: Domestic and global credit impact of Korean conflict would depend on duration and severity

Moody's Investors Service says that while the potential of a military escalation on the Korean peninsula remains for now a low-probability event, the credit impact of a conflict — whether short or prolonged — would affect domestic and global issuers.

Particularly in the case of a prolonged conflict, issuers globally could suffer credit negative effects ranging from low to severe, with those showing the largest reliance on the Korean economy proving the most vulnerable.

The credit implications of such a conflict would be transmitted through three channels: 1) immediate physical damage to infrastructure and assets in Korea, and possibly cyber disruptions; 2) global trade disruptions; and 3) financial-market volatility.

Physical damage would be the most relevant transmission channel for Korean entities, while global trade and financial market channels would be most relevant in the prolonged scenario for global entities.

Moody's conclusions are contained in its just-released report, "Cross-Sector -- Korean Peninsula: Duration, severity of a military conflict would determine credit-negative effects".

Moody's assumes that a relatively short-lived conflict, lasting a few weeks, would cause material physical damage, but not fundamentally and durably weaken Korea's economy, government finances or institutions. In this scenario, Moody's expects the government's capacity and willingness to support the entities it owns to remain unchanged.

Consequently, credit-negative implications would be limited for the Korean sovereign (Aa2 stable) and for many companies and financial institutions in the country.

Companies in the technology, retail, transportation, and utility sectors might experience a greater impact, if their key facilities that are concentrated in areas close to the border with the North were damaged, but Moody's expects the impact would be largely contained.

In addition, rated Korean banks would see limited impact because of strong government support. Limited liquidity risk on banks would mean little impact on structured finance deals. And short-lived physical damage would lead to no material drop in revenue for insurance companies.

In the event of a limited conflict, both in duration and geographical scope, global supply chains would continue to function without serious disruption. Financial market volatility from some adverse market reactions both globally and regionally would dissipate rapidly. Thereafter, the credit implications for global entities would be very limited.

A prolonged conflict, lasting at least one or two quarters and involving a wider range of regional countries, would have much larger credit implications.

In Korea, the loss of life, and destruction of production and operating facilities would reduce domestic demand and disrupt supply chains, likely negatively impacting almost every company across all sectors of the economy to varying degrees. Such an impact would erode the companies' credit profiles and increase refinancing risk. Moody's would also expect government support for Korean companies and financial institutions to decline.

Moody's would also expect severe negative credit implications on a wide range of Japanese sectors. Direct physical damage in Japan (A1 stable) could be significant, given Japan's close geographic proximity to Korea.

Globally, the impact on electronics and related sectors would be material, where companies rely largely on Korean produced components such as memory chips and liquid crystal displays and cannot source adequate replacements quickly.

Some companies in the energy sector, in particular liquefied natural gas suppliers, could be hurt by falling sales and prices, due to reduced demand from Korea and Japan, both of which are key global consumers of energy.

Moody's would also expect a moderate impact on commodity sectors, such as metals & mining, owing to the high volatility in market prices.

Decreased domestic demand would reduce Korea's imports of non-energy goods and services from the rest of the world, and therefore negatively impact some trade and intermediate-component makers in economies like Vietnam (B1 positive), Hong Kong (Aa2 stable) and Singapore (Aaa stable).

A fall in Korea's shipping capacity and likely trade disruption in some highly impacted Asian countries would also challenge some global ports and logistic companies, such as those in the West Coast of the US.