Key political risks to watch on the Korean peninsula

SEOUL, Feb 18 (Reuters) - North Korea again defied the

United States, Japan, Russia, the South and the United Nations

when it tested a nuclear bomb in February. The test, which

Pyongyang said was intended to counter hostility from

Washington, also drew condemnation from Beijing, its only major

ally.

The test effectively scuttled the remote prospect that young

leader Kim Jong-un was contemplating reform, however tentative,

and instead repeated a sequence of events straight from his

father Kim Jong-il's regime.

South of the border, most people were indifferent to or at

worst irritated by the nuclear detonation. Top of the list of

concerns for South Korea's President-elect Park Geun-hye, who

takes office on Feb. 25, is a deep slump in growth for its

export-driven economy.

The final quarter of 2012 was the seventh consecutive

quarter to feature sub-1 percent growth, its longest run of such

slow expansion for more than four decades.

SOUTH KOREA RATINGS:

S&P: A+

MOODY'S: Aa3

FITCH: AA-

These are the main political risks to watch:

NORTH KOREA: BACK TO THE OLD ROUTINE?

Kim Jong-un's public appearances last year at a pop concert,

on a rollercoaster, and with a wife in Western-style clothes may

have raised eyebrows and some hopes that he was ready to depart

from the traditional template of provocation and isolation, but

February's nuclear test showed he is very much his father's son.

Denunciation from the international community carries no

persuasive weight in the country which exists far beyond the

boundaries of normal diplomacy, while the one nation which does

have levers to pull in the North, China, is less likely than

ever to take meaningful action.

The U.S. military "pivot" towards Asia, combined with a

longstanding fear that a collapsed North would lead to a

pro-Washington unified Korea on its border, means Beijing feels

it has little choice but to carry on backing the Kim regime with

money and trade.

Barring a decisive intervention from outside, which is

extremely unlikely, the only threat to Kim's grip on power will

come from within.

Serious challenges will only arise if the army and the

handful of families who control practically all resources that

enter the country feel threatened, and with political reform not

even close to appearing on Kim's "military-first" agenda, there

is nothing to suggest this is on the horizon.

What to watch:

- Any sign of tough new sanctions against North Korea.

- More aggressive lines taken in Washington, Tokyo and

Seoul.

- Signs, however improbable, that Beijing is losing patience

with Kim Jong-un.

SOUTH KOREA: CHALLENGES FOR PRESIDENT PARK

President-elect Park Geun-hye, the daughter of South Korea's

former military ruler Park Chung-hee, won December elections to

become the country's first female leader, but will take over an

economy whose years of rapid growth seem unlikely to be repeated

soon, and a society increasingly haunted by inequality and fears

of unemployment.

The euro zone's fiscal crisis and slowing growth

elsewhere hit South Korea's export-reliant economy in 2012,

prompting the central bank to twice cut interest rates, while

the government took fiscal stimulus steps worth around $12

trillion.

The finance ministry has set its first growth target for

2013 at 3 percent while the Bank of Korea in January forecast a

2.8 percent gain for 2013 gross domestic product. The median

forecast from the latest Reuters survey in January was for a 3.0

percent rise for the year.

A common complaint among South Koreans is the behaviour of

big business groups known as 'chaebol', which include the

country's best known firms like Samsung and Hyundai. Often

accused of corrupt practices and exerting undue influence on

lawmaking, these family-owned firms control assets worth more

than half of country's GDP.

Park's left-wing challenger had threatened to end the web of

shareholdings that permit family control of such huge

enterprises, but she is unlikely to limit their scope.

The central bank held interest rates steady for a fourth

straight month at 2.75 percent, but warned that Japan's monetary

policy could impact growth.

A weakening yen means Japanese products are more competitive

overseas, and is bad news for the South Korean car and consumer

electronics firms which compete against Japanese exporters.

What to watch:

- Signs of a pickup in euro zone and other Western economies

where South Korean exports are consumed.

- If the weakening yen prompts South Korea to try to lessen

the value of the won.

- Interest rates and GDP figures throughout 2013.

(Editing by Daniel Magnowski)

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