Asia's fourth largest economy has bounced back from North Korea's nuclear shock but a prolonged crisis would hit much harder, analysts and officials say. Share prices plunged 2.41 percent to 1,319.40 Monday after the test but the market recovered steadily during the week to close at 1,348.60 on Friday.
"Most foreign investors who sold after the nuclear test were hedge funds," said Goldman Sachs analyst Lim Tae-Sup.
Financial officials said the recovery proved foreign investors were still confident about South Korea's economy.
"Our markets have been quickly stabilising thanks to consistent trust and confidence by foreign investors in our economic fundamentals," said Financial Supervisory Commission chief Yoon Jeung-Hyun.
Policymakers and economists, however, worry that the crisis, if prolonged, will seriously affect that confidence. "A protracted crisis may erode consumer confidence, hurt investment and worsen the economic slowdown," said Yoon Duck-Ryong of the Korea Institute for International Economic Policy.
The business community is also closely watching to see how severe the UN sanctions on North Korea - agreed Saturday in New York - will be.
"Our economy will be affected by how the United Nations and the international community respond to North Korea's action," Bank of Korea (central bank) governor Lee Seong-Tae said.
Potential risks cited by the central bank include a hard landing of the US economy, a rebound in oil prices and sanctions by the international community against North Korea.
"We will closely watch the event as it could influence the currency's value, consumer spending or investor sentiment," Lee said after the central bank left its key interest rate unchanged at 4.5 percent Thursday.
Economic officials concede South Korea may have to change economic targets for 2007 if nuclear tensions escalate. They fear a prolonged crisis may drive away foreign investors, hurt domestic spending and even reduce exports.
"The test has not affected real economic activities so far. But its impact may be serious, depending on how the international community responds to the issue," Vice Finance Minister Bahk Byong-Won said.
"The government will reflect any risks related to North Korea's nuclear test in next year's economic policy plan."