Rebuilding North Korea could cost $63 billion and South Korea is set to benefit
That rebuilding North Koreaâs economy could cost billions of dollars wonât come as much of a surprise to observers of the reclusive state, but just how much South Korea is willing to invest in, and benefit from, the economic potential of its unpredictable neighbor is yet to be seen.
In the afterglow of the historic meeting between President Donald Trump and North Korean leader Kim Jong Un, attention has turned toward the possible rebuilding the rogue stateâs isolated economy.Ed Jones | AFP | Getty Images People walk through a public square outside the central railway station in Pyongyang on June 12, 2018.
But the reconstruction of the country hit by sanctions and heavily reliant on China wonât be easy, or cheap. In fact, analysts and economists at Citi estimate that the cost of rebuilding North Koreaâs transportation and energy infrastructure could stand at $63.1 billion.
âIf the recent summits lead to the opening up of the North Korean economy, we estimate that it would need $63.1 billion in the long term to rebuild its transportation and infrast ructure sectors â" railroads, roads, airports, sea ports, power plants, mines, oil refineries, and gas pipelines,â Citi analysts led by Jin-Wook Kim said in a research note Tuesday.
The cost of infrastructure investment in North Korea would be varied, with an estimated $24.1 billion needed for 28 identified railroad projects, $22.8 billion necessary for 33 road projects and 16 power plant projects that could cost around $10 billion. The immediate cost of implementing such rebuilding projects would be an estimated $11.6 billion, the analysts said in the note.
Value to the South
Korea was split in two following the end of World War II when Japanâs 35-year rule over the nation ended. A later war bet ween the North and South in the 1950s entrenched the divide that remained in place ever since.
Now, South Korea is keen to forge peaceful links with its bellicose neighbor â" and the Winter Olympics in PyeongChang earlier in the year were a step toward better relations â" the path to any kind of reunification is unclear and fraught with obstacles.
On a global level, relations could also be improving. A recent summit between Trump and Kim signaled that the regime could be rehabilitated with the global community â" if it goes ahead with a pledge to denuclearize.
It remains to be seen if North Korea will do this, but Citiâs analysts said they were prompted to compile the research given recent summits suggesting âa normalization of economic ties between North Korea and the rest of the world could be possible.â This, they explained, would give the country greater access to foreign capital for infrastructure investment and any benefits of cross-border activity into South Korea in the short term would reduce the unification costs in the longer term.Susan Walsh | Reuters President Donald Trump makes a statement before saying goodbye to North Korea leader Kim Jong Un after their meeting in the Capella Hotel after their working lunch, on Sentosa island in Singapore June 12, 2018.
Rebuilding North Korea is likely to significantly involve neighboring countries including South Korea, which in the short run would provide a demand boost for South Korean companies, Citi said, particularly those involved in the construction and building materials sectors. Over the medium term, sectors in the South Korean economy which can use improved infrastructure to explore opportunities â" like mining exploration â" in the North, also stand to benefit.
Analysts added that South Korea would likely help to finance the rebuild, utilizing public resources, including state-owned policy banks and a multi-lateral fund, âto finance its investment given the significant externalities and risks involved.â
The reason that impoverished North Korea needs infrastructure spending has been largely due to its economic isolation and sanctions which have restricted foreign trade and investment. North Korea has also spent very little on its infrastructure, plowing its money into military spending instead. The country is reported to have the highest military spending to GDP ratio (23 percent in 2005 to 2015) in the world.
While the economic impact of North Koreaâs rebuild on South Korea âis likely to be small,â Citi said, the value of any investments would be found in the geopolitical confidence boost it would create.
âIf the mor e immediate projects (of $11.6 billion) are implemented within a year and South Korean companies take a 60 percent share, we estimate South Koreaâs economic growth would improve by only 0.07 percentage points. However, a more significant outcome would be a boost in confidence from a sharp reduction in the geopolitical risk premium, rather than the actual dollar value of the additional spending itself,â analysts noted.
However, they conceded that the âactual pace of implementation is likely to be very protracted as considerable time is needed to plan and complete a project even in a favorable geopolitical and regulatory climate.â
Giving a view on equities, the opening up of North Koreaâs economy âwould be positive for KOSPI valuations (lower geopolitical risk premium) as well as earnings, in our view,â they said.
In what the analysts called their âblue-sky scenario,â where North Koreaâs gross domestic product (GDP) per capita reaches 66 percent of South Koreaâs current level, âSouth Korean companies would have a meaningful revenue opportunity, especially those that have a large share of domestic revenues.âSource: Google News South Korea | Netizen 24 South Korea