Moody's Investors Service said the escalation of tensions between the North Korean regime and the new US administration broadens the nature of geopolitical risk for South Korea, which is the most salient event risk for the sovereign and a constraint on the rating.
A further sustained escalation of tensions would affect Korea's economic and fiscal strength negatively.
The rating agency cautioned that slower growth in investment and consumption would weigh on overall growth and could necessitate larger fiscal stimulus measures.
However, Moody's observed that past episodes of rising tensions have not deterred investment or consumption in Korea and have not unsettled its financial markets.
In the current episode, spending decisions will be largely unaffected, Moody's said.
The agency forecasts GDP growth at 2.5 percent this year and 2.0 percent in 2018, which is in line with the rating agency's assessment that Korea's Economic Strength is 'Very High'.
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