Q & A - How will rocket affect S.Korea markets, economy?

By Yoo Choonsik

SEOUL (Reuters) - North Korea launched a long-range rocket on Sunday that passed over Japan, the government in Tokyo said, defying calls from world leaders to scrap a plan that has caused international alarm.

The U.S. State Department confirmed North Korea had launched the rocket but had no further details. South Korea's presidential Blue House would make a statement at 4:00 a.m. British time, KBS TV said.

Following are key questions and answers on the impact increased tensions with North Korea could have on South Korea's economy and markets (data compiled by Reuters):

HOW WILL THE SOUTH KOREAN ECONOMY BE AFFECTED?

The direct impact on South Korea's economy will be limited unless the tensions grow quickly to an armed clash with North Korea, which will dent private consumption and corporate investment at a time when exports are collapsing.

But Asia's fourth-largest economy, widely seen as having already fallen into its first recession in 11 years in the first quarter, will have to pay higher costs when borrowing abroad.

South Korea aims to raise $1 billion (675 million pound) or more this month in its first global sovereign bond offering in three years, sources said, and its banks are also busy paying back maturing debt because global credit markets remain volatile.

HOW WILL SEOUL MARKETS REACT?

South Korean financial markets could fall for a few days but the impact will be short-lived unless the tensions lead to an armed clash with North Korea.

Still, the won could see turmoil because the launch comes as investors have not fully recovered confidence in the currency, which had been hit hard by doubts about South Korea's ability to pay back maturing foreign debt.

South Korea had $194 billion in foreign currency debt at the end of last year that matures within this year, slightly smaller than the country's foreign reserves but a large amount when considering the still fragile global credit market situation.

WILL SOUTH KOREAN CREDIT RATINGS BE CUT?

Political risks involving North Korea, with which South Korea has technically been at war for nearly six decades, have constrained the South's sovereign credit ratings despite Seoul's growth into the world's 13th economic power.

The rocket launch itself is unlikely to lead to an immediate downgrade in South Korea's credit ratings as major international ratings agencies have said the recent situation was within their "tolerance range," already reflected in the current ratings.

But Fitch Ratings has a negative outlook on its A-plus long-term sovereign rating on South Korea, indicating the next move will be a cut. Standard & Poor's and Moody's each has a stable outlook for South Korean ratings.

HOW HAD SEOUL MARKETS REACTED IN 2006?

When North Korea launched a long-range rocket over the seas between the peninsula and Japan on July 5, 2006, South Korean markets fell modestly during the day but quickly returned to calm within several days.

Seoul's main stock market lost half a percent on July 5 but rebounded by 1.3 percent over the following week.

The won was stable, losing 0.3 percent on the very day and a further 0.2 percent over the next one week.

Foreigners sold a net 4.3 billion won ($3.22 million) in local shares and bonds on July 5 and a further net 514.7 billion won for the following week. But at that time, foreigners had been selling out of Seoul's stock market for months.

HOW WERE SEOUL MARKETS PERFORMING?

The Seoul stock market has been recovering on optimism the world economy is nearing its bottom. The KOSPI has gained more than 40 percent from the October lows although standing down 13 percent from levels in early September.

The won has been quickly recovering since plunging to 11-year lows against the dollar by early March on concerns about the country's severe dollar shortages, but many analysts say the currency is far from stable.

The South Korean currency is now up 20 percent since the March 6 intraday low of 1,596.9 per dollar, but it is still trading down 17 percent from levels in early September.

(Editing by Clarence Fernandez)