Moody's: Vietnam and Japan most exposed to credit impact of a potential Korea conflict

The US-based ratings agency, Moody’s Investors Service, is out with its latest report on the credit impact on global economies of a potential North Korean military conflict.

Key Points:

Moody’s Investors Service says that 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.

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 jeopardize a durable stabilization 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.

Moody's conclusions are contained in its just-released report, "Sovereigns -- Global, Vietnam and Japan most exposed to credit impact of a potential Korean conflict".

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.