Potential impact of the North Korean crisis by lindash

VIEWS: 31 PAGES: 5

More Info
									Economics@ANZ                      Potential impact of the North
                                   Korean crisis

                                   Implications for Asia and Australia


                                   Muted market reaction is spot on
13 October 2006
                                   North Korea’s announcement that it conducted a nuclear bomb test on 9 October
                                   has sparked a fury of diplomatic activity. The UN Security Council is deliberating
                                   on possible sanctions while the 6 countries involved in the 6-Party Negotiations
                                   with North Korea have been publicly and privately debating the next course of
                                   action.   North Korea itself has become more belligerent, stating that the
                                   imposition of full sanctions would be tantamount to an expression of war.
                                   The financial market reaction to heightened geo-political risk has been muted.
                                   Equity markets in Asia were down marginally, with Korea and Japan declining
                                   more significantly. The US dollar strengthened somewhat in a bout of risk
                                   aversion. But the sell-off was insignificant, and the recovery has been quick.
                                                                              Muted financial market response
                                     E x c h a n g e r a t e s , U S $ p e r l o c a l c u r r e n c y u n it ,                      S h a r e p r ic e in d ic e s
                                                                   in d e x e d
                                                                                                                190     1 Ja n 2 0 0 4 = 1 0 0
                                   115       03 Jan 2005 = 100

                                                                                                                                                                        K o re a
                                                                               K o re a
Authors:                           110                                                                          170

Amy Auster
Head of International Economics    105                                                                C hin a
+61 3 9273 5417                                                                                                 150

austera@anz.com                                                                T a iw a n                                         Ja p a n
                                   100
Jasmine Robinson
                                                                                                                130                                                                HK
Senior Economist International
+61 3 9273 6289                     95
robinsj7@anz.com                                                                          A u s t ra l i a
                                                                                                                110

                                    90                                                                                               T a iw a n



                                                                                                                 90
                                    85                                                                                                                        C hin a
                                                     Ja p a n



                                    80                                                                           70
                                     O c t -0 5    D e c -0 5    M a r- 0 6     Ju n -0 6          S e p -0 6     O c t -0 5    D e c -0 5        M a r-0 6        Ju n -0 6       Se p -0 6


                                   In our view, the market is correct in shaking off recent events in North Asia, as
                                   the fundamental economic implications are completely unclear. The threat of
                                   further nuclear tests reflects a defiant regime, but there are so many scenarios
                                   that could evolve from the present situation that it is impossible to price in the
                                   risks that emanate from North Korea’s actions. In this brief note, we review
                                   some scenarios and the economic implications for North Asia and Australia.

                                   Australia’s economic links with N Asia
                                   The situation in North Korea is important not only for the Korean peninsula, eg
                                   North and South Korea, but also for the North Asian giants of China and Japan.
                                   The Korean peninsula sits between these two regional powers, and the
                                   relationship between China, Korea and Japan has a troubled history. A political,
                                   social or military upheaval on the Korean peninsula has significant potential to
Our Vision:                        ripple through both China and Japan.

For Economics@ANZ to be the        Japan, China and Korea are, respectively, Australia’s first, second and third
most respected, sought-after and   largest export market for goods. Collectively, they absorb 40% of all of
commercially valued source of      Australia’s merchandise exports. They also are responsible for more than 90% of
economics research and             Australia’s iron ore exports, and over half of its coal exports.
information on Australia, New
Zealand, the Pacific and Asia.
 Economics@ANZ                                                                          North Korea - 13 October 2006

           Australia’s top 10 export markets                     3. Tight sanctions are imposed; North Korea
      2005           Goods        Services      Gds & Svcs          initiates limited military action (not including
                                                % share of          nuclear arsenal) against South Korea and/or
                     (A$ bn)      (A$ bn)                           Japan.
                                                  total

 Japan                28.41         3.13            17.9         4. Tight sanctions are imposed; North Korea
                                                                    initiates limited military action that includes
 China                16.12         2.49            10.6
                                                                    nuclear arsenal against South Korea and/or
 US                   9.26          4.43            7.8             Japan.
 Korea                10.95         1.23            6.9      Of the above scenarios, most observers tend to
                                                             believe that the future will lie somewhere between
 NZ                   9.00          2.75            6.7
                                                             #1 and #2 – eg, that rhetoric will be uncomfortable
 UK                   4.97          4.24            5.2      but military action will not occur. If so, there would
 India                6.98          1.03            8.01     not be any significant economic implications of the
                                                             North Korean crisis, other than bouts of US dollar
 Singapore            3.96          2.42            3.6      strength accompanying some of the more worrying
 Taiwan               5.52          0.42            3.4      headlines.

 Thailand             4.13          0.54            2.7      In a backward sort of way, this #1-#2 scenario
                                                             could be positive in the longer-term for North Asia,
 TOTAL               138.96         37.25           100
                                                             particularly if it assists with the new warming of
Source: ABS, Economics@ANZ                                   diplomatic relations between Japan and China. Over
                                                             the past few years, China has been on the opposite
As Economic@ANZ has written extensively, the                 side of the fence on the North Korean issue, holding
natural resources sector is one of Australia’s main          to its position that it is not opposed to any country
growth drivers in this business cycle, not only              developing     nuclear     technology   for  peaceful
because of the contribution to trade but also                purposes. China’s position on this issue, which has
because of the wealth effect of the investment boom          informed its relationship with both North Korea and
and rising share market. Make no mistake about it –          Iran, has been a thorn in the side of the US and
Australia’s economic future is heavily linked with the       Japan. Now that North Korea has clearly stated its
three largest economies of North Asia, and any               intention to develop nuclear technology for military
military conflict that significantly decreased demand        purposes, China’s position on North Korea has quite
for Australia’s key commodities exports would have           evidently shifted and could well continue to move
an immediate and negative effect on the Australian           closer in the direction of the US and Japan in the
economy.                                                     future.
            Australia's exports to North Asia                In addition to changes in China, the past month has
           2005          Japan       China        Korea      seen a major change in Japan with the election of
 Exports (A$ bn)         28.4        16.1          10.9      Prime Minister Shinzo Abe to succeed Junichiro
                                                             Koizumi in September. The hawkish Abe entered
 Iron ore (% sh.         11.7        35.6          10.1
                                                             office with a clear priority to restore closer
 of exports to          (30.0)*     (51.9)*      (10.0)*
 country)                                                    diplomatic relations with China, which became
 Coal                    31.8         3.3          23.2
                                                             strained during the Koizumi years through repeated
                                                             visits to the Yasukuni Shrine. The North Korean
                        (41.3)*      (2.4)*      (11.6)*
                                                             nuclear test occurred as Abe was in Beijing on a
*: Figures in brackets denote % share of total exports of
                                                             state visit, the first state visit from Japan to China in
product
Source: ABS                                                  five years. Thus, while Abe has raised some hackles
                                                             in Asia by calling for a constitutional amendment to
Potential for economic disruption                            remove restrictions on the mandate of Japan’s
                                                             military – some of which may be motivated by
While the stakes in this crisis are potentially huge, it
                                                             concerns about the future of Korea – an important
is important to remain clear-headed in identifying
                                                             détente with China has begun and may be
both the base-case and the worst-case scenarios,
                                                             strengthened by a sense of common purpose
and their probability of occurring. While claiming no
                                                             against a regional nuclear arms race.
expertise in political science or military strategy,
commentary from informed observers seems to hint             The #3-#4 scenarios around aggressive military
at the following possible scenarios:                         action by North Korea are clearly potentially more
                                                             negative for the North Asian region, but the
      1.    Some additional sanctions are imposed; no
                                                             economic impact would depend on the severity of
            further nuclear tests occur; rhetoric remains
                                                             the conflict and its length. Although military conflicts
            high but no change on the ground.
                                                             result in human tragedy and property loss, like
      2. Tight sanctions are imposed with the sign-          natural disasters they do not necessarily depress
         off of the Chinese and Russians; North              demand in the medium term because of the
         Korea undertakes another nuclear test;              required investment in military hardware and
         rhetoric remains high but no change on the          rebuilding in a post-war period. Steel, the main
         ground.                                             output that is created by Australia’s iron ore and


                                                                                                              Page 2
Economics@ANZ                                                                                   North Korea - 13 October 2006

coal exports to the region, would be heavily in                          North Korea : economic trends
demand in this scenario. The bottom line is that it is
impossible to project what the economic impact on                         GDP growth                        Structure of Economy
                                                                                                                       (% of GDP, 2004)
Australia would be of a military conflict on the            7    % YOY
                                                            6
Korean peninsula. A short term disruption to                                                                          Electricity, gas & water
                                                                                                                       (4.5%)
                                                            5                                                                             Agriculture, forestry
Australia’s exports to the region would be expected,        4
                                                                                                Services (32.3%)                           & fisheries (26.7%)


but the medium term and longer term implications            3
cannot be assumed.                                          2
                                                            1

North Korea’s longer term future                            0
                                                           -1
In all of the concern about North Korea, it is             -2
                                                                                                                                                    Mining
                                                                                                                                                    (8.7%)

important not to overlook the fact that this is a very     -3
                                                           -4
poor country with an extremely authoritarian and                                                Construction (9.3%)
                                                           -5                                                                  Manufacturing
isolated government. Nobody knows the rationale            -6
                                                                                                                               (18.5%)


behind the timing of Kim Jong-Il’s motivation to test      -7
nuclear weapons, but the possibility that the test              95 96 97 98 99 00 01 02 03 04

was undertaken to distract the North Koreans from         Sources: Bank of Korea

the desperate state of the country or to bolster
support for the regime cannot be discounted.
                                                          Economic impact muted, for now
    North and South Korea – A Comparison                  Our base case scenario is the #1-#2 scenario
                                                          outlined above, in which diplomatic wrangling
             2004                North        South
                                                          continues but military confrontation is avoided. We
 Population (mn)                  22.7        48.1        therefore do not anticipate a significant economic
 Nominal GNI (US$ bn)             20.8         681        impact in the coming months, although there may
                                                          be financial market reaction to headlines related to
 GNI per capita (US$)              914       14,162
                                                          this issue. Nonetheless, the situation remains
 Real GDP growth                   2.2         4.6
                                                          unpredictable, with great potential to affect
 Energy Industry                                          Australia’s economic outlook in the longer term
 Coal (1000 tons)                22,800       3,190       should the worst case scenarios come to pass.
 Actual Power generation          20.6        342.1
 capacity (bn kW)

 Crude oil imports (mn bbl)        3.9        825.8
 Agriculture production
 Grain (1000 tons)                4,312       5,669
 Rice (1000 tons)                 1,800       5,000
 Mineral production
 Iron ore (1000 tons)             4,579        226
Source: Bank of Korea

It well known that the economy is very weak and
that millions of North Koreans are starving. The
imposition of further sanctions, if successful, could
potentially bring about the eventual collapse of the
regime. This is possibly the most significant political
and economic scenario out of all of the above. A
collapse of North Korea and potential reunification
with South Korea would shift the balance of power in
North Asia and represent both a major economic
and political event. Like the reunification of
Germany, an equivalent situation in Korea would
initially involve a massive humanitarian relief effort
followed by a substantial and prolonged need for
investment in an effort to improve the living
standards of North Korea.




                                                                                                                                                 Page 3
 Economics@ANZ                                                                                        North Korea - 13 October 2006

ANZ Research
Economics@ANZ
Saul Eslake                Fiona Allen
Chief Economist            Business Manager
+61 3 9273 6251            +61 3 9273 6224
eslakes@anz.com            allenf@anz.com

Tony Pearson               Julie Toth                  Mark Rodrigues            Riki Polygenis           Amber Rabinov
Head of Australian         Senior Economist,           Senior Economist,         Economist,               Economist,
Economics                  Industry                    Australia                 Australia                Australia
+61 3 9273 5083            +61 3 9273 6252             +61 3 9273 6286           +61 3 9273 4060          +61 3 9273 4853
pearsont@anz.com           tothj@anz.com               rodrigum@anz.com          polygenr@anz.com         rabinova@anz.com


Amy Auster                 Jasmine Robinson            Dr Alex Joiner
Head of International      Senior Economist,           Economist,
Economics                  International               International
+61 3 9273 5417            +61 3 9273 6289             +61 3 9273 6123
austera@anz.com            robinsj7@anz.com            joinera@anz.com

Paul Braddick              Ange Montalti
Head of Financial System   Senior Economist,
Analysis                   Financial System Analysis
+61 3 9273 5987            +61 3 9273 6288
braddicp@anz.com           montalta@anz.com

Warren Hogan               Cherelle Murphy
Head of Markets Research   Economist, Markets
+61 2 9227 1562            +61 3 9273 1995
hoganw1@anz.com            murphc10@anz.com

ANZ Investment Bank
Warren Hogan             Sally Auld                    Tony Morriss              Cherelle Murphy          Patricia Gacis
Head of Markets Research Senior Interest Rate          Senior Currency           Economist, Markets       Fixed Income Analyst
                         Strategist                    Strategist
+61 2 9227 1562          +61 2 9227 1809               +61 2 9226 6757           +61 3 9273 1995          +61 2 9227 1272
hoganw1@anz.com          aulds@anz.com                 morria15@anz.com          murphc10@anz.com         gacisp@anz.com


Sarah Percy-Dove           John Manning                Bradley Bugg
Head of Credit Research    Senior Credit Analyst       Senior Credit Analyst
+61 2 9227 1142            +61 2 9227 1493             +61 2 9227 1693
percydos@anz.com           manninj1@anz.com            buggb@anz.com

Research &
Information Services
Mary Yaxley                Marilla Chant              Manesha Jayasuriya
Head of Research &         Senior Information Officer Information Officer
Information Services
+61 3 9273 6265            +61 3 9273 6263             +61 3 9273 4121
yaxleym@anz.com            chantm@anz.com              jayasurm@anz.com
ANZ New Zealand
Cameron Bagrie             Khoon Goh                   John Bolsover
Chief Economist            Senior Economist            Economist
+64 4 802 2212             +64 4 802 2357              +64 4 802 2287
bagriec@anz.com            gohk@anz.com                bolsovej@anz.com

Sean Comber                Steve Edwards               Kevin Wilson
Economist                  Economist                   Rural Economist

+64 4 802 2286             +64 4 802 2217              +64 4 802 2361
combers@anz.com            edwards1@anz.com            Kevin.Wilson@nbnz.co.nz




                                                                                                                            Page 4
Economics@ANZ                                                                       North Korea - 13 October 2006

Important Notice
Australia and New Zealand Banking Group Limited is        your personal needs and financial circumstances.
represented in:                                           Under no circumstances is this document to be used
AUSTRALIA by                                              or considered as an offer to sell, or a solicitation of
Australia and New Zealand Banking Group Limited           an offer to buy. In addition, from time to time ANZ
ABN 11005 357 522                                         Bank, ANZ NZ, ANZSI, their affiliated companies, or
10th Floor 100 Queen Street, Melbourne 3000,              their respective associates and employees may have
Australia                                                 an interest in any financial products (as defined by
Telephone +61 3 9273 6224 Fax +61 3 9273 5711             the Australian Corporations Act 2001), securities or
                                                          other investments, directly or indirectly the subject
UNITED KINGDOM by:
                                                          of this document (and may receive commissions or
Australia and New Zealand Banking Group Limited
                                                          other remuneration in relation to the sale of such
ABN 11 005 357 522
                                                          financial products, securities or other investments),
Minerva House, PO Box 7, Montague Close, London,
                                                          or may perform services for, or solicit business
SE1
                                                          from, any company the subject of this document. If
9DH, United Kingdom
                                                          you have been referred to ANZ Bank, ANZ NZ,
Telephone +44 20 7378 2121 Fax +44 20 7378
                                                          ANZSI or their affiliated companies by any person,
2378
                                                          that person may receive a benefit in respect of any
UNITED STATES OF AMERICA by:                              transactions effected on your behalf, details of which
ANZ Securities, Inc. (Member of NASD and SIPC)            will be available upon request. The information
6th Floor 1177 Avenue of the Americas                     herein has been obtained from, and any opinions
New York, NY 10036, United States of America              herein are based upon, sources believed reliable.
Tel: +1 212 801 9160 Fax: +1 212 801 9163
                                                          The views expressed in this document accurately
NEW ZEALAND by:                                           reflect the author’s personal views, including those
ANZ National Bank Limited                                 about any and all of the securities and issuers
Level 7, 1-9 Victoria Street, Wellington, New             referred to herein. The author however makes no
Zealand                                                   representation as to its accuracy or completeness
Telephone +64 4 802 2000                                  and the information should not be relied upon as
                                                          such. All opinions and estimates herein reflect the
In Australia and the UK, ANZ Investment Bank is a
                                                          author’s judgement on the date of this document
business name of Australia and New Zealand
                                                          and are subject to change without notice. No part of
Banking Group Limited, ABN 11 005 357 522 (“ANZ
                                                          the author's compensation was, is or will directly or
Bank”), which holds an Australian Financial Services
                                                          indirectly relate to specific recommendations or
licence no. 234527 and is authorised in the UK by
                                                          views expressed about any securities or issuers in
the Financial Services Authority (“FSA”). In New
                                                          this document. The author’s compensation will, be
Zealand, ANZ Investment Bank is a business name
                                                          based upon, among other factors, the overall
of ANZ National Bank Limited WN / 035976 (“ANZ
                                                          profitability of ANZ, including profits from
NZ”).
                                                          investment banking revenues.
This document is being distributed in the United
                                                          ANZ Bank, ANZ NZ, ANZSI, their affiliated
States by ANZ Securities, Inc. (“ANZSI”) (an
                                                          companies, their respective directors, officers, and
affiliated company of ANZ Bank), which accepts
                                                          employees disclaim any responsibility, and shall not
responsibility for its content. Further information on
                                                          be liable, for any loss, damage, claim, liability,
any securities referred to herein may be obtained
                                                          proceedings, cost or expense (“Liability”) arising
from ANZSI upon request. Any US person(s)
                                                          directly or indirectly (and whether in tort (including
receiving this document and wishing to effect
                                                          negligence), contract, equity or otherwise) out of or
transactions in any securities referred to herein
                                                          in connection with the contents of and/or any
should contact ANZSI, not its affiliates.
                                                          omissions from this communication except where a
This document is being distributed in the United          Liability is made non-excludable by legislation.
Kingdom by ANZ Bank for the information of its            Where the recipient of this publication conducts a
market counterparties and intermediate customers          business, the provisions of the Consumer
only. It is not intended for and must not be              Guarantees Act 1993 (NZ) shall not apply.
distributed to private customers. In the UK, ANZ
Bank is regulated by the FSA. Nothing here excludes
or restricts any duty or liability to a customer, which
ANZ Bank may have under the UK Financial Services
and Markets Act 2000 or under the regulatory
system as defined in the Rules of the FSA. This
document is issued on the basis that it is only for
the information of the particular person to whom it
is provided. This document may not be reproduced,
distributed or published by any recipient for any
purpose. This document does not take into account



                                                                                                          Page 5

								
To top