While the economic impact of North Korea’s rebuild on South Korea “is likely to be small,” Citi said, the value of any investments would be found in the geopolitical confidence boost it would create.
“If the more immediate projects (of $11.6 billion) are implemented within a year and South Korean companies take a 60 percent share, we estimate South Korea’s 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,” analysts noted.
However, they conceded that the “actual 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.”
Giving a view on equities, the opening up of North Korea’s economy “would be positive for KOSPI valuations (lower geopolitical risk premium) as well as earnings, in our view,” they said.
In what the analysts called their “blue-sky scenario,” where North Korea’s gross domestic product (GDP) per capita reaches 66 percent of South Korea’s current level, “South Korean companies would have a meaningful revenue opportunity, especially those that have a large share of domestic revenues.”