A historic summit between the leaders of North and South Korea has raised the prospect of a formal peace treaty by the end of this year.
After decades of military standoff between the two sides, their leaders made a declaration of peace and promised a nuclear-free Korean Peninsula.
Such a possibility would spell big investment opportunities on the peninsula, according to Jim McCafferty, head of Asia Equity Research at Nomura Securities.
“I think the priorities of North Korea may be changing and may be shifting towards economic development and for that reason, engagement with neighbouring countries makes a great deal of sense.”
The sanctions on North Korea are “beginning to bite”, explains McCafferty. “North Korea historically had depended on subsidies from Russia and China, and those subsidies were largely withdrawn back in the early 1990s. Since then, North Korea has had to engage in some form of communication with western countries to try to get some form of subsidies. The sanctions have been in place now for over a year and they’re hitting quite hard, so that’s the reason perhaps they’re engaging with other countries.”
A reunification opportunity, which excites the market, “is really a very, very small probability,” says McCafferty, and adds: “What we do see as a more likely scenario that North Korea becomes subsidised or helped by western countries, not just South Korea.”
If a denuclearisation option is achieved, “there might be some economic benefits that other countries can provide and with that provision, the South Korean companies, Japanese companies, Chinese companies could be involved in some reconstruction of North Korea, which as a country has not kept up with others in the region and is quite backward in terms of simple GDP (gross domestic product) per head mechanics.”
He says that in terms of the size of the economy, at one point in the 1970s, North Korea’s GDP per head was at a parity with South Korea, but “that’s just no longer the case. North Korea has an opportunity – with 25 million people. That population could be engaged as a labour force and involved in areas like textiles and getting opportunities which are currently in place with ASEAN countries, such as Vietnam or Myanmar.”
“So, potentially there is opportunity for South Korean capital to merge with relatively inexpensive North Korean labour and combine certain areas of real-cost manufacturing – that’s where perhaps opportunity is.”
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