FACTBOX: Five political risks to watch in South Korea

SINGAPORE (Reuters) - South Korea's attractiveness as an investment destination has long been impacted by the risk of conflict with the North, as well as concerns over transparency and openness to foreign investment.

Following is a summary of key South Korea risks to watch:

* THE NORTH

North Korea's second nuclear test in May and always unpredictable behavior have raised tensions on the peninsula. The greatest risk to regional economies would be a brief but intense military conflict -- North Korea could lob tens of thousands of artillery rounds into the Seoul region that is home to about half of South Korea's population, and fire hundreds of missiles at major cities in South Korea and Japan. Such an attack might take less than an hour but would do severe economic damage. It would also mean suicide for the North's leaders who would be hit by a U.S.-led counterattack. Another key risk is that the sudden implosion of the North Korean regime leads to a difficult reunification process that undermines the South Korean economy.

Key issues to watch:

-- Latest rhetoric from Pyongyang. North Korea's intentions are often difficult to decode, but for the moment the regime seems keen to ease tensions after a period of belligerence.

-- Any clues on the stability of the North Korean regime. South Korean asset prices would dive if it appeared North Korea was set to implode and reunification was likely.

* GOVERNMENT EFFECTIVENESS

President Lee Myung-bak is likely to face continued difficulties maintaining support even within his own party -- several figures are jockeying for prominence as they eye a run for presidency when his single, five-year term expires in 2013. A parliament described by local media as dysfunctional has stymied many of the economic reforms proposed by Lee to make the economy more competitive and open to foreign investment. The inflexible bureaucracy adds to policy delays and inefficiency.

Key issues to watch:

-- A significant change in government effectiveness would impact investor perceptions. Most of the risk may be on the upside, as markets have priced in a fairly high degree of government inefficiency and policy delays. A recovery in Lee's popularity could also help speed reforms through parliament.

* ECONOMIC REFORM

The economy remains dominated by large chaebol conglomerates, and highly dependent on exports. The government's interventionist attitude to the economy often comes at the expense of longer-term reforms. Foreign investors often encounter informal barriers to entry, and the government has not shown any particular desire to strongly encourage foreign capital.

Key issues to watch:

-- Progress, or lack thereof, in passing the delayed economic reforms promised by President Lee but yet to be implemented.

* CORRUPTION

Transparency and corruption remain an issue in South Korea, and the suicide of former President Roh Moo-hyun while he was under investigation for graft focused more attention on this divisive subject. But for foreign investors, the biggest threat is the hidden barriers rather than corruption which is seen as less of a problem than in many regional countries.

Key issues to watch:

-- South Korea's rank in global corruption perceptions indices -- signs it was slipping back in the rankings could impact investor decisions.

-- Any return of strong nationalist criticism of foreign company profits.

* TRADE

The government is trying to press ahead with free trade deals but this is a contentious issue both within South Korea -- where the opposition has repeatedly tried to block deals -- and abroad, where South Korea is frequently accused of protectionism.

Key issues to watch:

-- The government's success in agreeing more bilateral free trade agreements -- and getting them passed by parliament.

(Compiled by Andrew Marshall and Jonathan Thatcher; Editing by Sanjeev Miglani)