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Cablegate: Dprk Economy Shrinks in 2006: Bank of Korea

VZCZCXYZ0000
PP RUEHWEB

DE RUEHUL #2596/01 2400738
ZNR UUUUU ZZH
P 280738Z AUG 07
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6255
INFO RUEHBJ/AMEMBASSY BEIJING 3035
RUEHKO/AMEMBASSY TOKYO 3173
RUEHMO/AMEMBASSY MOSCOW 8223
RUEHSH/AMCONSUL SHENYANG 3438
RHEHNSC/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC//OSD/ISA/EAP//
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SEOUL 002596

SIPDIS

SENSITIVE
SIPDIS

NSC FOR WILDER AND TONG
STATE FOR EAP, NP, EAP/K AND EEB/IFD/OMA
PASS USTR FOR CUTLER AND AUGEROT
TREASURY FOR A/ISA/POGGI, ITI/CHRISTOPOULOS AND ITT/CHANG

E.O. 12958: N/A
TAGS: ECON EAGR PREL KS KN
SUBJECT: DPRK ECONOMY SHRINKS IN 2006: BANK OF KOREA
PERSPECTIVES


SUMMARY
----------
1. (SBU) Relying on official but suspect DPRK data, the
Bank of Korea's (BOK) report on the DPRK economy is
noteworthy for spotlighting 2006 as a recession year, ending
a seven-year growth streak. The DPRK economy shrank 1.1
percent in real terms -- compared with 3.8-percent growth
reported for 2005. The BOK attributed this poor performance
to international isolation stemming from the DPRK's pursuit
of its nuclear weapons program, widespread energy shortages
coupled with retarded infrastructural development, and lower
agricultural output due to unfavorable weather conditions.
Key sectors such as construction and agriculture led the
decline, while manufacturing and mining posted negligible
growth. Tourism dropped sharply due to security and political
concerns in the wake of the North's nuclear test in the
second half of 2006, limiting the DPRK,s access to hard
currency. End summary.

DPRK Real Economic Growth
-------------------
(Unit: percent)

,97 ,98 ,99 ,00 ,01 ,02 ,03 ,04 ,05 06
--- --- --- --- --- --- --- --- --- ---
-6.3 -1.1 6.2 1.3 3.7 1.2 1.8 2.2 3.8 -1.1


2. (SBU) In 2006, North Korea,s agriculture and fisheries
output fell 2.6 percent from a year earlier, chiefly due to
unfavorable weather conditions. Manufacturing as a whole
stagnated, but mining output grew slightly. Electric power,
gas, and water production rose 2.7 percent, down from a
4.4-percent increase in 2005, mainly because of weaker
hydroelectric output. Tourist visits to Mt. Geumgang and
Pyongyang declined from 366,000 in 2005 to 265,000 in 2006.
In the wake of this tourism drop, food and lodging industry
income shrank 2.6 percent. The BOK linked this drop in the
DPRK's hard-currency earnings to international concerns over
its nuclear test in the second half of 2006.

3. (SBU) DPRK economic growth by Sector:

Economic Growth by Industry
----------------------------
(Unit: Percent)

North Korea South Korea
,05 ,06 ,05 ,06
---------------------------------------------
Agriculture & 5.0 -2.6 0.7 -2.6
Fisheries

Mining & Industry 4.4 0.9 7.0 8.3
Mining 3.5 1.9 -1.7 2.7
Manufacturing 4.9 0.4 7.1 8.4
(Light Industry)(3.9) (-0.6) (1.8) (1.1)
(Heavy Ind. & (5.4) (1.1) (8.1) (9.7)
Chemical)

Electricity, Gas 4.4 2.7 7.8 3.5
& Water Supply

Construction 6.1 -11.5 -0.1 -0.1

Services 1.3 1.1 3.4 4.2
(Government) (0.6) (0.8) (2.3) (2.9)
(Others) (2.9) (1.8) (3.6) (4.4)
--------------------------------------------- -
GDP 3.8 -1.1 4.2 5.0


4. (SBU) In 2006, North Korea,s primary industries
(agriculture, fishing, and construction) shrank slightly as a
share of total output, while services, mining, and industry
expanded, reflecting longer-term structural changes to North
Korea,s economy. For the past several years, agriculture and
fisheries have accounted for a declining portion of total

economic activity (30.4 percent in 2001 vs. 23.3 percent in
2006,) while services and industry have grown steadily,
albeit marginally, in importance. Food production made up a
significantly large proportion of the DPRK's GDP, while
non-governmental services, a major component of the South
Korean economy, contributed fractionally to the North,s GDP.

5. (SBU) Sectoral Contributions to North Korea,s GDP
-------------------------------------------
(Unit: Percent based on Nominal Prices)

North Korea South Korea
,05 ,06 ,05 ,06
--------------------------------------------
Agriculture & 25.0 23.3 3.4 3.2
Fisheries

Mining & Industry 28.9 29.6 28.7 28.2
Mining 9.9 10.2 0.4 0.4
Manufacturing 19.0 19.5 28.4 27.8
(Light Industry) (6.7) (6.7) (5.1) (4.9)
(Heavy Ind. & (12.4) (12.8) (23.2) (22.9)
Chemical)

Electricity, Gas 4.3 4.5 2.3 2.3
& Water Supply

Construction 9.6 9.0 9.2 9.1

Services 32.2 33.6 56.3 57.2
(Government) (22.6) (23.7) (10.1) (10.4)
(Others) (9.6) (9.8) (46.2) (46.7)
---------------------------------------------
GDP 100.0 100.0 100.0 100.0

DPRK GDP by Sector
------------------
Unit: Real prices based on 2000 index,
in South Korean Billion Won)

Real Prices Nominal Prices
,05 ,06 ,05 ,06
--------------------------------------------- ---
Agriculture& 7,118.6 6,931.2 6,186.5 5,676.4
Fisheries

Mining/Industry5,289.4 5,336.4 7,156.3 7,216.3
(Mining) 1,616.2 1,646.8 2,456.3 2,474.9
(Manufac.) 3,673.2 3,689.6 4,700.0 4,741.4

Electric, Gas 1,022.2 1,049.8 1,057.4 1,101.4
& Water Supply

Construction 1,688.2 1,494.2 2,368.6 2,182.6
Services 6,333.9 6,404.5 7,966.1 8,181.2
(Government) 4,247.3 4,281.4 5,599.2 5,784.1
(Others) 2,086.6 2,123.2 2,366.9 2,397.1
Whole, Retail,
Food & Lodging 105.9 103.1 129.6 122.7

Transportation
& Communic. 597.2 637.4 664.1 691.7

Finance, Insurance
& Real Estate1,380.5 1,390.2 1,569.4 1,579.6

Other Services 3.0 2.5 3.8 3.1
--------------------------------------------- ----
GDP 21,452.3 21,216.1 24,734.8 24,357.9


Economic Gap Widens Further between the Two Koreas
--------------------------------------------- -----
6. (SBU) The economic differences between South and North
Korea deepened further in 2006. North Korea,s nominal gross
national income (GNI - including total output and


foreign-earned income) was estimated at USD 25.6 billion,
while South Korea,s GNI totaled USD 887.3 billion-- 35 times
larger than that of North Korea.

7. (SBU) North Korea,s external trade, excluding
inter-Korean trade, totaled USD 3 billion, down 0.2 percent
from 2005. However, inter-Korean trade rose 27.8 percent in
2006 to reach USD 1.3 billion, based on a 53-percent surge in
the North's exports to South Korea (mainly KIC-made
products). As a result, the DPRK's chronic trade deficit with
South Korea shrank modestly. The North,s overall foreign
trade deficit continued its perennial climb, approaching USD
1.5 billion and spotlighting its need to earn foreign
exchange. In contrast, South Korea's foreign trade totaled
USD 635 billion, up 16.3 percent from 2005. While the value
of inter-Korean trade flows is still modest relative to the
South's overall trade, inter-Korean trade has posted
impressive growth from 2001 through 2006, with nominal trade
more than tripling during that five-year period.

8. (SBU) Economic Comparisons between the two Koreas:


2006 North ) South Economic Comparison
--------------------------------------
Unit North(A) South (B) B/A
---- -------- --------- ---
Population 1,000 23,079 48,297 2.1

Economic Growth Percent -1.1 5.0 -

Nominal GNI USD Billion 2.56 887.3 34.7

GNI per Capita USD 1,108 18,372 16.6

External Trade
Overall Trade USD Billion 3 634.9 211.9
(Exports) & 0.95 325.5 343.8
(Imports) & 2.05 309.4 151.0

Exchange Rate DPRK Won/USD 141 955.51 -

Energy Industry
(Coal Production) 10K Ton 2,468 280 0.11
(Power Generation 10K Kw 782 6,551 8.4
Capacity)
(Power Generation 100 Million 225 3,812 16.9
Output) kWh
(Crude Oil Imports)10K bbl 384 88,843 231.4

Agriculture & Fishery
Output
Grain 10K ton 448.3 530 1.2
(Rice) & 189.4 468 2.5
Fishery & 92.3 303.2 3.3

Mineral Production
Iron Ore 10K ton 504.1 22.7 0.05
Non-ferrous Metal & 8.6 187.7 21.8

Industrial Goods
Output
Auto 10K cars 0.44 384 872.8
Crude Steel 10K ton 118.1 4,843.3 41.0
Cement & 615.5 4,920.9 8.0
Fertilizer & 45.4 318.3 7.0
Synthetic Fiber & 2.9 145.7 50.2

Infrastructure
Rail Length Km 5,235 3,392 0.6
Road Length Km 25,544 102,061 4.0
Unloading Capacity10Kton 3,700 69,213 18.7
Shipping tonage & 90.4 1,180.2 13.1
--------------------------------------------- -
Source: Bank of Korea (BOK)
Note A: DPRK exchange rate denotes North Korea,s official
exchange rate against the US dollar.

COMMENT
-------
9. (SBU) The BOK report is notable for highlighting the
first DPRK economic recession since 1998. Estimating DPRK
economic performance since 1991, the BOK collects DPRK data
from the South's National Intelligence Service and various
research institutes. BOK analysts deem DPRK data to be
suspect, but make their best-guess estimates drawing on South
Korean market prices, value-added ratios, and exchange rates.
They were unavailable for comment on this report, but post
will be following up with them in the coming weeks. End
comment.
VERSHBOW

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