North Korea’s recent demolition of the inter-Korean liaison office in Kaesong will have a limited impact on the domestic financial market, South Korea’s fiscal and monetary authorities said Wednesday.

The Bank of Korea held a meeting Wednesday morning under the chairmanship of Deputy Gov. Yoon Myun-shik to review the global financial market’s response to the North Korean action and the impact on the domestic market.

At around 2:50 p.m. on the previous day, North Korea demolished the liaison office in the inter-Korean border area of Kaesong, heightening its latest retaliatory gestures against the South for sending anti-Pyongyang leaflets. Established in 2018 on the sidelines of the inter-Korean peace talks and the Panmunjom Declaration, the office has been deemed a symbol of peninsular communication.

“Following the demolition, the Korean won weakened slightly (against the US dollar) in the global financial market,” the BOK said in a release.

“But (other risk indicators such as) the foreign exchange stabilization bond spread and the credit default swap premium have declined, showing that the impact was limited.”

The BOK nevertheless vowed to keep a stern eye on the market as the development of the North Korea risk may further expand volatility, especially amid mounting concerns on a “second wave” of COVID-19.

Deputy Prime Minister and Finance Minister Hong Nam-ki also added in a close-door meeting of economy-related ministers that the slight change in the exchange rate was attributed to the strong dollar amid improving signals of the US economy, rather than the North Korean factor.

The composed stance of the government and the central bank was echoed by market observers.

“The peninsula peace mood which had lasted for around two years has recently chilled but the (recent) aggressive action has not had much impact on the financial market,” said Park So-yeon, analyst at Korea Investment & Securities.

As neither President Moon Jae-in nor North Korean leader Kim Jong-un has directly addressed the issue so far, there is still the possibility of a dramatic reconciliation, especially if US President Donald Trump chooses to play a peninsula peacemaker role ahead of the US presidential election slated for November, she added.

“The biggest agenda for the financial market at this point is the ongoing pandemic, (the government’s) responsive fiscal actions, and the economic recovery graph afterward.”

Samsung Securities also agreed that the direct impact will remain limited, but called for close monitoring on whether the communist state crosses the “red line.”

“What is more important is whether Pyongyang will resume its (former) intercontinental ballistic missile activities, in which case US President Trump will find himself politically under pressure to assume a hardline stance (towards Pyongyang),” said researcher Yoo Seung-min.

By Bae Hyun-jung (tellme@heraldcorp.com)