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Goldman Sachs Global ECS Research
2
Key topics
North Korea: Risks and opportunities
North Korea’s economy: At a crossroads
North Korea’s long-term growth potential
A united Korea: Projections and integration costs
Appendix
Goldman Sachs Global ECS Research
3
North Korea risks
1300
1320
1340
1360
1380
1400
1420
9:01
AM
9:31
AM
10:0
1 A
M
10:3
1 A
M
11:0
1 A
M
11:3
1 A
M
12:0
1 PM
12:3
1 PM
1:01
PM
1:31
PM
2:01
PM
2:31
PM
-2.6% in a minute
Intraday KOSPI reactions on May 25,2009 to the 2ndnuclear test by North Korea terms
Goldman Sachs Global ECS Research
4
North Korea Risks
The day of the event
Date Event KOSPI USD KTB 3yrKOSPI
turnoverKOSPI2 1M
ATM Vol
1998/08/31 Daepodong-1 rocket launch 0.3% 1.0% -10 bp (close: 11.40) +57.2% NA1999/06/15 Naval firefight in Yeon-pyong-do -2.2% -0.4% no chg (close: 6.70) -1.4% NA2002/06/26 Naval clash on the Yello Sea -7.2% -0.8% -3bp (close: 5.83) +21.2% +0.6%2004/09/23 Ballistic missile fire test -0.6% 0.1% +3bp (close: 3.55) -14.3% -1.9%2006/07/05 Daepodong-2 missile launch -0.5% 0.4% -4bp (close: 4.85) -3.5% +2.8%2006/10/09 Nuclear test -2.4% 1.5% +2bp (close: 4.59) +54.3% +25.4%2009/04/05 Long-range missile launch 1.1% -2.4% +4bp (close: 3.95) +1.1% -0.3%2009/05/25 Nuclear test & short-range missile fire -0.2% 0.1% -4bp (close: 3.81) +9.7% +6.2%2009/06/01 Short-range missile fire 1.4% -1.4% -2bp (close: 3.81) -9.8% +0.7%
Days taken to recover to the level of the day before the events
Date Event KOSPI USD KTB 3yrKOSPI
turnoverKOSPI2 1M
ATM Vol
1998/08/31 Daepodong-1 rocket launch NM 1 day NM 0 day NA1999/06/15 Naval firefight in Yeon-pyong-do 1 day NM NM 1 day NA2002/06/26 Naval clash on the Yello Sea 5 days NM NM 4 days 2 days2004/09/23 Ballistic missile fire test 5 days 11 days 4 days 1 day NM2006/07/05 Daepodong-2 missile launch 3 days 4 days NM 2 days 13 days2006/10/09 Nuclear test 5 days 13 days 9 days 0 day 5 days2009/04/05 Long-range missile launch NM NM 1 day NM NM2009/05/25 Nuclear test & short-range missile fire 5 days 4 days NM NM 10 days2009/06/01 Short-range missile fire NA NA NM 1 day 2 days
Goldman Sachs Global ECS Research
5
A United Korea could overtake France, Germany and possibly Japan in 30-40 years in terms of GDP
Source: GS Global ECS Research.
0
10000
20000
30000
40000
50000
60000
70000
80000
China
United
Sta
tes
Indi
a
Brazil
Russia
Indo
nesia
Mex
ico
United
Kor
ea
United
Kin
gdom
Turke
y
Japa
n
Franc
e
Germ
any
Nigeria
Philipp
ines
Canad
aIta
ly
South
Kor
ea Iran
Saudi
Ara
bia
2007 US$ bn
World in 2050 and a United Korea: GDP in USD terms (2007)
Goldman Sachs Global ECS Research
6
Source: GS Global ECS Research.
World in 2050 and a United Korea: GDP in USD terms (2007) (excluding China, US, India and Brazil)
0
1000
2000
3000
4000
5000
6000
7000
8000
Russia
Indo
nesia
Mex
ico
United
Kor
ea
United
Kin
gdom
Turke
y
Japa
n
Franc
e
Germ
any
Nigeria
Philipp
ines
Canad
aIta
ly
South
Kor
ea Iran
Saudi
Ara
bia
2007 US$ bn
A United Korea could overtake France, Germany and possibly Japan in 30-40 years in terms of GDP
Goldman Sachs Global ECS Research
7
Source: Bank of Korea, IMF, GS Global ECS Research.
North Korea’s real GDP is still lower than its 1992 levelOutput correction and recovery in formerly planned economies (real GDP, 1992=100)
The North Korean economy is at a crossroads
60
80
100
120
140
160
180
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Transitional economies (median)
North Korea
Russia
Kazakhstan
Index
-3.7
-6
-2.1
-4.1-3.6
-6.3
-1.1
6.2
3.7
1.2
2.2
3.8
-1.1
-2.3
3.7
1.3
-3.5
-4.2
1.8
-8
-6
-4
-2
0
2
4
6
8
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
3-year moving average
% chg yoy
N. Korea’s economy is stagnating recently
Goldman Sachs Global ECS Research
8
Source: CEIC, IMF, Bank of Korea, GS Global ECS Research.
Per capita income of North Korea in USD is similar to that of Vietnam and India
The North Korean economy is at a crossroads
North Korea* Vietnam Mongolia India China Cambodia Philippines Laos1995 1033 288 631 384 603 297 1055 3821996 989 338 598 410 701 295 1152 3881997 812 361 528 426 772 281 1122 3571998 572 357 480 423 819 253 867 2551999 714 374 441 449 865 281 992 2862000 757 402 455 451 949 288 989 3292001 706 413 482 459 1042 309 906 3272002 762 440 518 480 1135 327 958 3312003 818 492 582 559 1274 349 973 3802004 913 553 720 645 1490 394 1040 4332005 1056 639 905 734 1715 455 1159 4852006 1108 723 1224 816 2028 513 1352 5822007 1151 834 1503 1035 2567 649 1624 6752008 1067 1034 1981 1005 3267 818 1845 841
*Bank of Korea's estimates in KRW, which we have converted to USD at market exchange rates.
Note: Caution is needed in its direct comparison with those of other countries as the estimates are based on South Korean price and cost structures.
Goldman Sachs Global ECS Research
9
Source: Korea Development Institute, Korea Trade-Investment Promotion Agency, GS Global ECS Research.
Unofficial exchange rates are 20 times higher than the official rates
The planned economy system in N. Korea appears to be on the verge of collapse
1
10
100
1000
10000
1985 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2007
0
20
40
60
80
100
120
Black market premium (x) (RHS)
Official NKW/USD rate (in log)
Unofficial rate (in log)
Goldman Sachs Global ECS Research
10
North Korea’s closer economic ties with South Korea
0.0
0.5
1.0
1.5
2.0
2.5
2000 2001 2002 2003 2004 2005 2006 2007 2008
South Korea
Japan
China
Others
US$ bn
South Korea is North Korea’s largest export marketExports of North Korea in US$bn including exports to South Kora
Source: Korea Development Institute, Korea Trade-Investment Promotion Agency, GS Global ECS Research.
Goldman Sachs Global ECS Research
11
Source: CEIC, National Statistical Office, GS Global ECS Research.
Rural population in North Korea is at the level of South Korea in the late 1970s
North Korea has abundant and competitive labour force
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Vietnam
China
South Korea
North Korea
Goldman Sachs Global ECS Research
12
Source: Bank of Korea, GS Global ECS Research.
Industrial structure of N. Korea vs. S. Korea
The North Korea’s industrial structure is also similar to that of South Korea in the late 1970s
North Korea ('08)
South Korea ('08)
South Korea ('79)
Agriculture and fishing 21.6 2.5 21.3Mining 12.1 0.2 1.1Manufacturing 22.5 28.1 24.7
Light 6.7 4.6 ...Heavy and petrochem 15.8 23.5 ...
Electricity, gas and water 3.4 1.8 2.2Construction 8.3 7.0 7.9Services 32.2 60.3 42.7
Government 22.8 10.7 ...Others 9.4 49.6 ...
Total 100.0 100.0 100.0
Goldman Sachs Global ECS Research
13
Note: Reserves for the South Korea are the sum of confirmed and estimated reserves as of 2007. North Korean data are potential reserves, based on the latest North Korea data
North Korea is rich (and South Korea is poor) in mineral resources
Strong synergies between South and North Korea- Mineral resources
North Korea South Korea
Unit Reserves Value (KRW trn) Reserves Import %
Magnesite bn ton 6.0 1,376 - 100 Limestone bn ton 100 996 10 1 Uranium ore 000 ton 4,000 628 - 100 Lignite bn ton 16 343 - 100 Anthracite coal bn ton 4.5 257 1.4 65 Iron bn ton 5.0 214 0.02 99 Gold 000 ton 2 45.3 0.04 93 Zinc 000 ton 21,000 12.6 588 100 Lead 000 ton 10,600 9.12 404 100 Copper 000 ton 2,900 5.41 56 100 Silver 000 ton 3-5 1.86 1.58 95 Molybdenum 000 ton 54 1.13 22 99 Rosette graphite 000 ton 2,000 0.75 121 100 Tungsten trioxide 000 ton 246 0.39 127 89 Barite 000 ton 2,100 0.22 842 100 Fluorspar 000 ton 500 0.08 477 100 Talcum 000 ton 700 0.06 8,152 92 Kaolinite 000 ton 2,000 0.03 106,335 11 Manganese 000 ton 100-300 0.01 176 100 Nickel 000 ton 10-20 0.00 - 100 Asbestos 000 ton 13 0.00 511 -
Total (times 2008 GDP) 142
Source: Korea Resources Corporation, Korea Institute for National Unification, Hyundai Research Institute, IAEA, EIA, GS Global ECS Research.
Goldman Sachs Global ECS Research
14
North Korea has more favorable demographics than the South (2007)
Strong synergies between South and North Korea:demographic
South Korea
North Korea
United Korea
Demographic composition (in % of total)0-14 years 18 23 2015-64 years 72 68 7165 or over 10 9 9
Birth rate per 1000 9.9 15.1 11.6Death rate per 1000 6.0 7.2 6.4Annual population growth 0.4 0.8 0.5
48.1 48.9 49.3 49.3 49.1 48.6 47.7 46.342.3
2324 25 26 27 27
27
28
25
0
10
20
30
40
50
60
70
80
2005 2010 2015 2020 2025 2030 2035 2040 2050
0.0
0.5
1.0
1.5
2.0
2.5
South Korea North Korea South/North ratio (RHS)
Population of a United Korea could near 80million at its peak in 2030
Source: UN, CIA, GS Global ECS Research. Source: UN, National Statistical Office, GS Global ECS Research.
Goldman Sachs Global ECS Research
15
Strong synergies between South and North: productivity gains
Source: IMF, GS Global ECS Research.
Trough year in
real GDP
Total declines since 1992
before recovery
Avg growth from the trough year or 1992 to
2008
Real GDP in 2008
(1992=100)
Armenia 1993 -14.1% 8.8% 305Azerbaijan 1995 -46.3% 12.1% 236Belarus 1995 -27.6% 7.5% 185Albania 1992 NM 6.4% 269Georgia 1994 NM 6.5% 242Kazakhstan 1995 -27.2% 6.6% 168Kyrgyz Republic 1995 -34.2% 5.1% 125Bulgaria 1997 -27.5% 5.2% 126Moldova 1999 -41.9% 5.9% 98Russia 1998 -29.2% 6.8% 137Tajikistan 1996 -41.5% 7.3% 137Turkmenistan 1997 -42.8% 14.1% 243Ukraine 1999 -50.4% 6.8% 90Uzbekistan 1995 -8.3% 5.3% 180Czech Republic 1992 NM 3.2% 167Slovak Republic 1993 NM 5.2% 229Estonia 1994 -1.6% 6.2% 201Latvia 1993 -11.4% 5.6% 201Hungary 1993 -0.6% 3.6% 168Lithuania 1994 -24.4% 5.9% 170Croatia 1993 -8.0% 4.3% 172Slovenia 1992 NM 4.3% 195Macedonia, Former Yugoslav Republic of1995 -10.2% 2.8% 129Poland 1991 NM 4.5% 211Romania 1992 NM 3.5% 173Europan average -24.8% 6.1%
China na NM 10.2% 470
Mongolia 1993 -3.0% 5.5% 217Vietnam na NM 7.6% 323Asian average -3.0% 7.8%Asian and European average -13.9% 6.9%
Memorandum item:
United States na NM 2.9% 159North Korea 1988 NM 2.0% 98South Korea na NM 5.0% 219
Output decline and recovery in transition economies
Goldman Sachs Global ECS Research
16
Strong synergies between South and North Korea- productivity gains
Source: IMF, GS Global ECS Research.
Growth Environment Scores for BRICs and N-11 (2008)*
0
1
2
3
4
5
6
7
8
9
South K
orea
China
Mex
ico
Brazi
l
Turkey
Vietn
am
Russia
Phillphin
esIra
nIn
dia
Indonesi
a
Egypt
Bangl
adesh
Pakist
an
Nigeria
North K
orea
* The North Korea score is a tentative one, based on our estimates of the 13 GES indicators.
Goldman Sachs Global ECS Research
17
Currencies in most transition economies strengthened more rapidly than output growth
Strong synergies between South and North Korea -currency appreciation
Real appreciation accounted for 80% of USD GDP growth in transition economies over 1993-2007
Source: IMF, GS Global ECS Research. Source: IMF, GS Global ECS Research.
Real Appreciation and Real GDP Growth: Transitional Economies (average per annum,1993-2006)
2523
19 18 18 1816
15 14 14 1312 12 11 11
9 9 9 8 8 7 6 6 5 43 2 2
7
3
5
43
1
1 5
-1
3
6
6
1
-1
3
1
53
3
03
1
8
5
4
10
35
-5
0
5
10
15
20
25
30
35
Real GDP
Real appreciation
% USD GDP Growth in Transition Economies
-18-11
-1 2 3 3 3 6 6 6 8 9 8 10 10
97
4640
14
-9-3
4 6
16 1611 11
20
21
-20
0
20
40
60
80
100
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Real Exchange Rate
Real GDP
Goldman Sachs Global ECS Research
18
Strong synergies between South and North Korea- currency appreciation
Source: IMF and SNU (2009), GS Global ECS Research.
Price structures of North and South Korea differ widely
Item UnitSouth Korea (KRW;2008)
North Korea (NKW;2002)
PPP rates (KRW/NKW)
Electricity kwh 55 2.1 26
Diesel kl 1,465 38 39
Rice kg 2,705 43 63
Bus Fare 1 use 1,000 2.0 500
Subway fare 1 use 1,000 2.0 500
House rent 1/ m 2̂ 19,697 2.0 9,848
House rent 2/ m 2̂ 179,341 2.0 89,670
1/ Pyongyang for North Korea, and minimum nation- wide Apt prices for South Korea.
2/ Pyongyang for North Korea, and average Seoul Apt prices for South Korea.
Goldman Sachs Global ECS Research
19
A United Korea – growth potential
Source: GS Global ECS Research.
The GDP (in USD terms) of a United Korea could exceed that of France, Japan and Germany in 30-40 years
1000
2000
3000
4000
5000
6000
7000
United Korea
J apan
Germany
France
Transition phase Consolidation phase Maturing phase
US$ bn (2007)
Goldman Sachs Global ECS Research
20
A United Korea – the potential size of the economy
Source: Bank of Korea, UN, GS Global ECS Research.
Indicative long-term projections
Real GDP Index (2008 trn KRW) yoy% (average per annum)United Korea
South Korea
North Korea
United Korea
South Korea
North Korea
2010 1090 1062 28 2% 2% 1%2015 1353 1317 35 4% 4% 5%2020 1609 1559 49 4% 3% 7%2025 1855 1786 69 3% 3% 7%2030 2097 2001 96 2% 2% 7%2035 2324 2197 128 2% 2% 6%2040 2570 2405 165 2% 2% 5%2045 2793 2600 193 2% 2% 3%2050 3027 2812 215 2% 2% 2%
USDGDP (2007 USD bn) yoy% (average per annum)United Korea
South Korea
North Korea
United Korea
South Korea
North Korea
2010 $943 $917 $26 -1% -1% 2%2015 $1,643 $1,596 $47 12% 12% 12%2020 $2,077 $1,964 $113 5% 4% 19%2025 $2,574 $2,299 $274 4% 3% 19%2030 $3,280 $2,645 $635 5% 3% 18%2035 $4,176 $3,051 $1,125 5% 3% 12%2040 $4,956 $3,448 $1,508 3% 2% 6%2045 $5,519 $3,747 $1,772 2% 2% 3%2050 $6,056 $4,073 $1,982 2% 2% 2%
Per capita income (2007 USD1000) Real appreciation yoy%United Korea
South Korea
North Korea
United Korea
South Korea
North Korea
2010 $13 $19 $1 -2% -3% 1%2015 $22 $32 $2 7% 7% 7%2020 $28 $40 $4 1% 1% 12%2025 $34 $47 $10 1% 0% 12%2030 $43 $54 $23 1% 1% 11%2035 $55 $64 $40 1% 1% 6%2040 $66 $74 $53 1% 1% 1%2045 $76 $84 $62 0% 0% 0%2050 $86 $96 $70 0% 0% 0%
Total population (mn) North/South ratio
United Korea
South Korea
(mn)
North Korea
(mn)Population
per capita
income
USD GDP
2010 73 49 24 49% 6% 3%2015 74 49 25 51% 6% 3%2020 75 49 26 52% 11% 6%2025 76 49 27 54% 22% 12%2030 76 49 27 56% 43% 24%2035 76 48 28 58% 63% 37%2040 75 46 28 61% 72% 44%2045 73 45 29 64% 74% 47%2050 71 42 28 67% 72% 49%
Goldman Sachs Global ECS Research
21
A United Korea – Growth potential of the mineral sector
Source: Korea Resources Corporation, GS Global ECS Research.
North Korea’s mineral wealth could provide sizeable income in the long run
0
50
100
150
200
250
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
0
50
100
150
200
250
Mineral sector income under even use of mineral wealth
Non-mineral sector income
Total Incomes under incremental use of mineral wealth
Benchmark GDP projections
W trillion (2008) W trillion (2008)
Goldman Sachs Global ECS Research
22
A United Korea – comparison with other economies
Selected indicators of North and South Korea
Economic growth of two integration economies
Source: Bank of Korea (2009)
1994 2008 1989
North South N/S North South N/S East Ger West Ger E/W
Population (million) 23.0 44.5 51.7% 23.3 48.5 48.0% 16.7 61.4 27.2%Per capital income (US$) 923 10076 9.2% 1064 19231 5.5% 12700 38500 33.0%Gross National Income (US$bn) 21.2 448.4 4.7% 24.9 928.7 2.7% 212 2364 9.0%External trade (% of GNI) 9.9 52.5 18.9% 15.4 92.3 16.6% 50 80.9 61.8%Exports ($ bn) 0.9 96 0.9% 1.1 422 0.3% n.a. n.a. n.a.Exchange rate against USD 2.16 802 0.3% 130 1100 11.8% n.a. n.a. n.a.Government budget (US$ bn) n.a. 88.3 n.a. 3.5 212.6 1.6% 46.5 78.7 59.1%
Before Integration After(-5 to -1 year) (1 to 5 years) (6 to 10 years)
East Germany 2.7 1.4 1.9West Germany 2.3 -0.5 1.8
Hong Kong 4.9 1.4 6.4China 12.4 8.2 10.6
Source: Bank of Korea, UN, OECD.
Goldman Sachs Global ECS Research
23
Integration costs: vary a lot depending on the speed and policy assumptions
Inter-Korea integration costs – survey of literature
SourcesResearch
yearIntegration
period Costs Note
Korea Development Institute 1993 2000-2010 $286bn German style unification
Korea Development Institute 1994 2000 $1000bn German style unification
Korea Development Bank 1994 1994-2004 $805bnGerman style unification (60% income differential)
Korea Development Institute 1997 1995-2005
9-11% of GDP for the first 5 years;7.5% of GDP for the second 5 years 50% income differential
FitchRatings 2003Over 10-15 years $15-20bn per year
Rand Institute 2005 Over 5 years $50bn-$670bnTo double North Korea GDP within 4-5 years
Samsung Economics Research 2005 2015 $546bnTo provide for social safety net and industrialization
Bank of Korea 2007Over 13-39 years
German style: $500-900bn over 22-39 years; Economic zone style: $300-500bn over 13-22 years
To reach North Korea's per-capita income of $10,000
Source: Korea Tax Institute (2008), GS Global ECS Research.
Goldman Sachs Global ECS Research
24
A United Korea – income convergence
Illustrative scenario of a North-South income convergence(Number of years for North Korea’s per-capita income to reach half of the South Korea level)
Source: Bank of Korea, GS Global ECS Research.
41
21
13
0
5
10
15
20
25
30
35
40
45
Case I Case II Case III
Case I: North Korea's output is growing 6% points faster thanSouth
Case II: Case I and the North Korean currency is appreciating 6%faster than the South currency
Case III: North is growing 3% points faster than South, and theNorth currency appreciating 5% faster than the South currencyplus annual transfers of 1% of South Korean GDP to North Korea
Goldman Sachs Global ECS Research
25
Appendix: Korea at a glance
45%
46%
47%
48%
49%
50%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000S Korea (RHS) N Korea (RHS) N Korea to S Korea (000)
-8
-6
-4
-2
0
2
4
6
8
10
12
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
S Korea
N Korea
Population Real GDP yoy growth rate
Source: Bank of Korea Source: Bank of Korea
Goldman Sachs Global ECS Research
26
Appendix: Korea at a glance
Gross National Income per capita North Korea’s GDP yoy growth (% chg by industry)
Source: Bank of Korea Source: Bank of Korea
-20
-15
-10
-5
0
5
10
15
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Agriculture, Foresty, Fishery Mining & Manufacturing GDP
0%
4%
8%
12%
16%
20%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-
400
800
1,200
1,600
2,000
2,400
S Korea (RHS) N Korea (RHS) N Korea to S Korea
(W 10K)
Goldman Sachs Global ECS Research
27
Appendix: Korea at a glance
North Korea’s industrial structure
South Korea’s industrial structure
Source: Bank of Korea Source: Bank of Korea
0%
20%
40%
60%
80%
100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
Services
Construction
Electricity,Gas &water
Mining &Manufacturing
Agriculture,Foresty, Fishery
0%
20%
40%
60%
80%
100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
Services
Construction
Electricity,Gas &water
Mining &Manufacturing
Agriculture,Foresty, Fishery
Goldman Sachs Global ECS Research
28
Appendix: The Gaesung Industrial Complex
The GIC’s output is growing rapidly(in US$mn and in % of N. Korea exports)
Investment in the GIC(Investment in KRW bn)
Source: Ministry of Strategy and Finance, GS Global ECS Research.
0
50
100
150
200
250
300
2005 2006 2007 2008
0%
5%
10%
15%
20%
25%
In US$ million
In percent of total exports (RHS)
0
50
100
150
200
250
300
350
400
450
500
Private companies Government Land corporation KEPCO Korea Telecom
In KRW bn
Goldman Sachs Global ECS Research
29
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