For decades, South Korea's economy and financial markets have shrugged off North Korea's periodic saber-rattling. But as Washington and Pyongyang persistently belt out aggressive rhetoric, the increased probability of conflict will be credit negative for Seoul, according to Moody's Investors Service.
Asia's fourth-largest economy currently has an 'AA2' rating under Moody's but that assessment could change if escalating politics result in an economic impact that the government can't respond to, said Marie Diron, associate managing director at the agency's sovereign risk group.
"What makes it different this time is the broadening nature of geopolitical risk," she told CNBC. "We're going from a period where we saw a potential fall of the regime in the North as a tail-risk to the rising probability of war on the Peninsula."
This week, North Korea accused President Donald Trump's administration of pushing the region "closer to the brink of nuclear war" after U.S. bombers flew over the area in a training drill with the South Korean air force. Meanwhile, Beijing urged all parties to "stay calm and stop irritating each other" on Wednesday after receiving a rare rebuke from Pyongyang, Reuters reported .