FACTBOX - Key political risks to watch on the Korean peninsula

SEOUL Thu Mar 1, 2012 8:54am IST

North Korean leader Kim Jong-Un (front) visits a unit under the command of the Korean People's Army 4th Corps stationed in the southwestern sector of North Korea, in this undated picture released by the North's KCNA in Pyongyang February 26, 2012. KCNA said Kim inspected the 1st and 4th Battalions under the KPA Unit 403 stationed in the forefront area. REUTERS/KCNA

North Korean leader Kim Jong-Un (front) visits a unit under the command of the Korean People's Army 4th Corps stationed in the southwestern sector of North Korea, in this undated picture released by the North's KCNA in Pyongyang February 26, 2012. KCNA said Kim inspected the 1st and 4th Battalions under the KPA Unit 403 stationed in the forefront area.

Credit: Reuters/KCNA

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SEOUL (Reuters) - The outside world is warily watching North Korea for any signs of instability following the death of iron-fisted ruler Kim Jong-il and the emergence of his young and untested son as the secretive state's new leader.

In a surprise move at the end of February, North Korea said it would suspend nuclear tests, uranium enrichment and long-range missile launches, and allow checks by nuclear inspectors. Though Pyongyang has backtracked repeatedly on past deals, it marked an apparent policy shift that could pave the way for resuming long-stalled disarmament talks.

Kim, who died of a heart attack in December, was the driving force behind the North's nuclear weapons and missile programmes, spending most of the country's meagre finances on the military even as millions went hungry. He ruled for 17 years.

The "Dear Leader" had a succession plan in place for a number of years, promoting his youngest son Kim Jong-un to prominent positions in the military and ruling party to ensure a third generation of dynastic rule.

The young Kim is being aided by his uncle, Jang Song-thaek, and powerful elements in the military, in what is seen as a collective rule.

Little is known about Kim Jong-un: only that he is believed to be in his late 20s and that he was educated in Switzerland for about two years.

He has moved quickly to try to build a hardline image by visiting military sites around the country, and by firing a series of verbal volleys against the South, vowing not to deal with the government in Seoul.

China, the North's closest ally, has expressed its support for the new leadership, while Seoul and Washington have both said they wish to see a stable transfer of power. So far, they say, the transition appears to be going smoothly.

Despite the change in leadership in Pyongyang, the North has not featured on the domestic political scene in the South, although both the ruling party's new chief and the opposition say Seoul should be more accommodating to Pyongyang.

This year, for the first time in two decades, the South will hold a parliamentary and presidential election in the same year.

The main issues are the economy, jobs and the growing wealth divide.

SOUTH KOREA RATINGS (Unchanged from February unless stated):

S&P: A

MOODY'S: A1

FITCH: A+

The cost of insuring against default on 5-year sovereign debt traded around 135 basis points in early March, down 15 points since the start of the year.

NORTH KOREA: WHAT NEXT?

Since his Kim Jong-il's death, the North has bestowed a string of titles including "great successor", "supreme commander" and "great leader" on Kim Jong-un as part of plan to build a personality cult around him.

Unlike his father who disappeared from public view for 100 days after the death of the state's founder Kim Il-sung in 1994, Kim Jong-un has embarked on a charm offensive by staging more than 15 "field inspections" in the past six weeks.

Analysts say Kim's visits, mostly to military sites, are designed to shore up his support within the army, and to prove his credentials as a "prepared leader".

The North has vowed it will continue with Kim Jong-il's songun, or military-first, policy and has called on its people to rally behind the young Kim. But it has also acknowledged the "burning issue" of food shortages and the need to fix its moribund economy.

Analysts say there is no evidence to suggest succession is veering off track, but say it is still early days.

Seoul has stated the change in leadership signals a possible "turning point" for inter-Korean relations and called for a return to dialogue. In February the North had talks with America, which passed without a breakthrough, and China, a discussion which included food aid.

The U.S. said that in return for the nuclear moratorium announced at the end of the February, it was ready to go ahead with a proposed 240,000 metric-tonne food aid package requested by North Korea and that more aid could be distributed, based on continued need.

South Korea maintains the North must suspend all nuclear activities before it can agree to a resumption of regional aid-for-disarmament talks. Pyongyang quit the forum in 2009.\

The United States has also said it is willing to return to talks with the North, but insists relations between the two Koreas must improve first.

What to watch:

-- Whether the North sticks to the nuclear moratorium, and how the international community responds.

-- Signs that the transition is going badly, and that there might be a coup attempt. Such signs could include unexplained disappearances of the elite, overt challenges to Kim Jong-un's authority, military-party friction, unusual military activity inside the country or on the Chinese side of the border.

-- Talks between the two Koreas, the United States, and China.

-- The North allowing the return of international nuclear inspectors. This would be seen as sign of the North's sincerity at wanting to rejoin the six-party forum.

-- For either Seoul or Pyongyang to make a concession which could end a three-year rift over the joint Mount Kumgang tourist resort in the North.

SOUTH KOREA: DIFFICULTIES FOR RULING PARTY

The struggling ruling conservatives have changed their party's name in a bid to revamp their image. The new name, Saenuri Party or "new world", was ridiculed by some who had trouble hiding their dismay that this was best the party could offer as a sign of reform.

Park Geun-hye has taken over as interim leader of the party as President Lee Myung-bak continues to slide into a 'lame duck' period with one year left in office. Park is finding it tough to breathe life into the party, and it is not clear whether she will succeed in averting a landslide defeat in the April parliamentary election. The party has also been hit by a string of corruption cases.

The main opposition party has completed a merger with a minority leftist party and picked a new leader, well on the way in preparations to contest the general election.

The Democratic United Party, which is expected to win April's parliamentary elections, said in February it would curb the power of the country's huge business conglomerates such as Hyundai and Samsung.

A liberal victory in this year's elections will mean a shift toward more welfare initiatives, and possibly closer engagement with North Korea. Such a result could also impinge on Seoul's close ties with Washington.

What to watch:

-- Conservative interim leader Park Geun-hye will oversee the nomination of candidates for the April election and will face the biggest challenge so far of dealing with people who do not get the nod. It could lead to further discord.

-- Popular software mogul turned professor Ahn Cheol-soo has not ruled entering politics. If he does join the political fray, the political landscape will change dramatically.

-- Democratic United Party's Moon Jae-in may take on a greater role, possibly putting him in direct line to declare candidacy for president. It would put him at the top of the so far very weak field of left-leaning candidates.

(Editing by Daniel Magnowski)

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