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Fitch Ratings deflates North Korea hopes: ‘Lengthy and unpredictable’ process lies ahead

  • Fitch Ratings warns the historic summit between South and North Korean leaders "does not eliminate risks associated with the military stand-off."
  • The summit took place after more than 30 years of North Korean missile tests and 12 years after its first nuclear test.
  • Observers worry that peace pledges made during the summit lacked crucial details, such as a mutually accepted definition of "denuclearization."
South Korean President Moon Jae-in and North Korean leader Kim Jong Un sign documents at the truce village of Panmunjom inside the demilitarized zone separating the two Koreas, South Korea, April 27, 2018.
Korea Summit Press | Reuters
South Korean President Moon Jae-in and North Korean leader Kim Jong Un sign documents at the truce village of Panmunjom inside the demilitarized zone separating the two Koreas, South Korea, April 27, 2018.

Fitch Ratings threw cold water on hopes for near-term peace on the Korean Peninsula on Monday, warning that the historic summit between South and North Korean leaders "does not eliminate risks associated with the military stand-off."

Despite newly positive sentiment stemming from the declarations of reconciliation between North Korea's Kim Jong Un and his South Korean counterpart Moon Jae-In, the ratings agency said in a statement that "a lengthy, unpredictable normalization of relations lies ahead."

Kim and Moon on Friday pledged to pursue peace and complete denuclearization of the Korean Peninsula, as well as work toward unification and end hostile acts.

The highly-anticipated summit took place after more than 30 years of North Korean missile tests and 12 years after its first nuclear test. The North had claimed the tests were a necessary deterrent to an attack from the U.S. or South Korea, the latter of which is home to more than 23,000 U.S. troops. All of this has left regional experts skeptical over the promise of disarmament and normalized relations.

The countries have technically been at war since fighting began in 1950 — an armistice was signed to end the violence in 1953, rather than a peace treaty. The peninsula has been divided since 1954, and the presidents' meeting was the first to take place in more than a decade.

The Fitch comments came amid an outpouring of speculation around the world as to the intentions of the rogue state's authoritarian leader. Many regional experts question whether North Korea's government is simply buying time, engendering goodwill in order to loosen economic sanctions that have crippled the country's already poor and state-controlled economy. Two previous summits, held in 2000 and 2007, failed to produce positive results despite similar promises from the North.

A man burns a North Korean flag with pictures of late North Korean leaders Kim Il Sung and Kim Jong Il as he takes part in a rally opposing the inter-Korean summit, near the demilitarized zone separating the two Koreas, in Paju, South Korea, April 27, 2018.
Kim Hong-ji | Reuters
A man burns a North Korean flag with pictures of late North Korean leaders Kim Il Sung and Kim Jong Il as he takes part in a rally opposing the inter-Korean summit, near the demilitarized zone separating the two Koreas, in Paju, South Korea, April 27, 2018.

Observers also worry that the agreements made during the summit lacked crucial details, such as a mutually accepted definition of "denuclearization."

"The joint declaration is simply a signed statement between two leaders and is not legally binding," experts at risk consultancy firm Eurasia Group said in a note at the weekend.

Costs of reunification

The long-term standoff poses geopolitical risks to South Korea's sovereign balance sheet, according to Fitch, that involve both the potential for conflict and possible costs of reunification. South Korea's National Budget Office estimates reunification costs at an average of 3.9 percent of gross domestic product (GDP) yearly over 45 years.

Still, the unexpected vows from the two leaders "should ease the heightened tensions" created by an escalation in nuclear activity by the North over the last year, Fitch said, adding that this "period of detente" lowers the risk of outright conflict.

Ratings agency Moody's meanwhile had a brighter outlook for inter-Korean relations, describing the summit as a prelude to more substantial relations that will "help to lower geopolitical risk," although it still regarded full disarmament as "unlikely."

But the likelihood of a permanent reduction in tensions remains unclear and further developments impossible to predict, Fitch cautioned. "Tensions could re-escalate quickly if the U.S. feels that summit diplomacy is not achieving its aim of denuclearization."

The North and South will hold high-level military meetings next month, and Moon has been scheduled to visit Pyongyang in the fall.

President Donald Trump is slated to meet Kim sometime in the coming months after a secret meeting between the North Korean leader and former CIA chief Mike Pompeo took place in early April.