Cablegate: North Korea Economic Briefing - November 2008

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UNCLAS SECTION 01 OF 05 SEOUL 002408

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E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG ETRD KN
SUBJECT: NORTH KOREA ECONOMIC BRIEFING - NOVEMBER 2008

Domestic Economy
----------------
DPRK Bond Prices Low and Falling
DPRK Cuts Food Ration for Farmers
DPRK Records 43 Percent Worsening in Hunger Index Score
UN: DPRK Urgently Needs Food for 40 Percent of Population

Foreign Aid
-----------
Italy Provides Food Aid to DPRK
German NGO Working to Complete Water Purification Project this Year
Swiss NGO Installs Wind Power Project, Considers More
WFP Seeks More Food Aid for DPRK
ROK Allocates USD 460 Million in Possible Aid to DPRK
Fourth U.S. Shipment of Food Aid (25,060mt) to DPRK
Australia and Canada Respond to WFP's Emergency Food Aid Request
Kuwait-DPRK Sign Loan Agreement

Inter-Korean Economic Cooperation
---------------------------------
DPRK Halves ROK Staffers at KIC, Suspends Kaesong Tour and Railway
October Inter-Korean Trade Falls 23% to USD 160 Million
KEPCO Loses USD 14 Million on KIC Electricity Supply over Four
Years
Number of South Korean Tourists to DPRK Plunges 88 Percent in
September
A ROK Chicken Franchise in Pyongyang Succeeds Business

Foreign Trade and Investment
----------------------------
Japan Extends Economic Sanctions against DPRK; More Actions
Possible
DPRK Reportedly Bans Chinese/Russian Goods from State-run Stores in
2009
DPRK-Kuwait Sign an Air Service Agreement
Air Koryo Plans to Replace Aircraft to Compete with Air China
Refurbishment of Rajin-Khasan Railway Link Begins
MasterCard Will Not Enter DPRK

Domestic Economy
----------------

1. (U) DPRK Bond Prices Low and Falling: Radio Free Asia (RFA)
reported November 7 by quoting Exotix Limited, a United
Kingdom-based investment bank, regarding North Korean bond prices --
"The price has fallen since July this year. The market then was in
the mid 20 cents, but it is now in the teens." RFA also quoted
Stuart Culverhouse, chief economist of ICAP, a British financial
firm, as saying "I don't think removal of North Korea from the list
of state-sponsoring of terrorism has any real practical consequences
at this stage. I think the slower pace of the Six Party Talks is
making progress from here harder." RFA said that North Korea's
outstanding bond debt is estimated at USD 1.6 billion.

2. (U) DPRK Cuts Food Ration for Farmers: Good Friends, a South
Korea-based civic group helping North Korea, alleged on October 23
that North Korea has ordered cuts in the food ration level for
farmers and is shifting the allocation to ensure the military has a
full food supply.

3. (U) DPRK Records 43 Percent Worsening in Hunger Index Score:
North Korea recorded a 43 percent increase (worsening) in the
International Food Policy Research Institute's 2008 Global Hunger
Index report. The DPRK's overall hunger rating was at the upper end
of the 'serious' level but still below the threshold for the
'alarming' or extremely alarming' levels. The report was footnoted
regarding the unreliability of data for North Korea.

4. (U) UN: DPRK Urgently Needs Food for 40 Percent of Population:
According to a FAO/WFP Crop and Food Security Assessment Mission
report widely cited in the ROK press, North Korea will urgently need
food aid for about 8.7 million North Koreans, mostly young children,
pregnant, nursing women and elderly people (40 percent of its total
population of 23 million) for the year through October 2009. It was
the first time such comprehensive field assessment mission since
2004. The FAO/WFP join mission consisting of six experts visited
six regions including Hwanghae and Pyongan Provinces in the North on
October 9-24 this year to assess fall harvests. The report
estimates total food production to be 4.21 million metric tons for

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November 2008-October 2009. The report concludes that North Korea
will face a cereal deficit of 836,000 metric tons, assuming
commercial imports of 500,000 metric tons. The report attributed
the low output of the farming sector in the North to:

-- Long-term decline in soil in fertility;
-- Shortages of inputs;
-- Extreme weather events;
-- Structural issues including constraints on market activities
-- Low fertilizer supplies (60 percent of 2007 levels)
-- Low fuel supplies (70 percent of 2007 levels)

Foreign Aid
-----------

5. (U) Italy Provides Food Aid to DPRK: RFA reported November 12
that the Development Cooperation Office of the Italian Foreign
Ministry decided to provide USD 320,000 worth of grain to North
Korea. The Italian government said that the food aid was a part of
its bilateral assistance program. The food will be delivered to
North Koreans in the first half of next year.

6. (U) German NGO Working to Complete Water Purification Project
this Year: RFA reported November 11 that an NGO, German Agro Action
(GAA), plans to complete water purification projects in North
Pyongan and Gangwon Provinces in the North by end of this year. GAA
replaced obsolete water pipes and refurbished water tanks and pump
facilities. Once the projects are completed, 30,000 North Korean
will benefit from the improvements. North Korea has been
requesting assistance in water purification and sewage systems since
2000. Several South Korean and European civic groups including
GAA, UNICEF and IFRC have been involved in drinking water and
sanitation projects in North Korea.

7. (U) Swiss NGO Installs Wind Power Project, Considers More: RFA
reported November 18 that Campus feur (actual spelling: f - u umlot
- r) Christus, a Swiss NGO, provided a 300W windmill and a 2KW
windmill last year and installed them in Hwangjoo County, North
Hwanghae Province, in North Korea. If the current evaluation shows
the project to be successful, the NGO will install more windmills in
the North next year. The NGO also plans to provide technical
training beginning next March.

8. (U) WFP Seeks More Food Aid for DPRK: Officials from FAO and WFP
visited the ROK's Ministry of Unification (MOU) in late October and
urged the government to help resolve food shortages in North Korea.
Jean-Pierre de Margerie, WFP's Pyongyang Office Director said to the
MOU that "millions" of North Koreans still face malnutrition and
warned of a "humanitarian emergency." The MOU, however, said "It's
our assessment that the current condition does not represent a
serious crisis in North Korea this year. North Korean officials
have told NGOs that grain crop yields this year are not bad." Kim
Ho-nyeon, an MOU spokesperson, said that rice and potato farming
have gone well in the North despite South Korea's decision to
withhold fertilizer assistance this year. WFP set a goal of
providing more than USD 500 million worth of emergency food aid to
North Korea in the next 12 months. WFP officials have been seeking
aid from donor nations to help meet that goal. WFP asked to provide
up to USD 60 million worth of aid last August. WFP reported that
much of the farming equipment in the North, including tractors and
trailers, are in a state of poor repair. North Korea also lacks
energy to run its farming equipment and does not have enough
chemical fertilizer.

9. (U) ROKG Allocates Budget for USD 460 Million in Possible Aid to
DPRK: The MOU announced in October that it earmarked 643 billion
won (USD 460 million) for a possible shipment of rice and fertilizer
to North Korea in 2009, categorized as humanitarian aid. Based on
ROKG policy pronouncements, an improved political environment would
be required before the aid would be procured and provided.

10. (U) Fourth U.S. Shipment of Food Aid (25,060 mt) to DPRK:
Yonhap News Agency reported that the United States aid agencies
including Mercy Corps, World Vision, Samaritan's Purse, Global
Resource Services and Christian Friends of Korea, shipped 25,060
metric tons of bulk corn and soy beans arrived in Nampo port, North
Korea in late November. The food is to be distributed to 894,000
vulnerable North Koreans through public distribution centers,
orphanages, schools and hospitals and nurseries in Jagang and North

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Pyongan Provinces. This is the fourth shipment since the U.S.
government committed to provide 500,000 metric tons of aid through
USAID.

11. (U) Australia and Canada Respond to WFP's DPRK Emergency Food
Aid Request: RFA reported in late October that the Australian and
Canadian governments have decided to contribute USD 3 Million and
USD 2 Million, respectively, to the WFP emergency operation to help
tackle food shortages in North Korea due to poor harvests, flood
damage and the sharp rise in fuel prices.

12. (U) Kuwait-DPRK Sign Loan Agreement: Voice of America reported
November 20 that Kuwait Fund for Arab Economic Development (KFAED)
and North Korea's Ministry of Urban Management signed a cooperation
agreement on November 19 in Pyongyang, North Korea. The agreement
lends USD 21.7 million to North Korea to finance a sanitation system
project in Pyongyang. KFAED said in a statement that the project
will help improve the environment and public health by raising the
performance of the city sewage systems.

Inter-Korean Economic Cooperation
---------------------------------

13. (U) DPRK Halves ROK Staffers at KIC, Suspends Kaesong Tour and
Railway: North Korean authorities demanded on November 24 that South
Korea halve the number of South Korean staffers at the KIC beginning
from December 1 this year. North Korea also asked Hyundai Asan
Corporation (HAC), which has operated the Kaesong city tour since it
began in December 2007, to suspend the tour. In addition, the North
Korean authority asked the South Korean government to halt
inter-Korean railway linking Munsan, South Korea and Bongdong, near
the KIC in North Korea and to close down the Inter-Korean Economic
Cooperation Office at the KIC, a communication channel for economic
cooperation projects between the two Koreas out of the KIC.

14. (U) Over 4,000 South Korean managers and construction workers
belonging to the Kaesong District Management Committee (KIDMAC),
HAC, HAC's subcontractors and South Korean state-owned firms such as
KEPCO and 88 South Korean factories were operating in KIC until late
November. MOU spokesman Kim Ho-nyoun said November 30 that the
South Korean government asked the North to allow 1,628 South Koreans
to stay at KIC, however, the North's final notification was set at
880 South Koreans. The 880 include 31 South Korean government
officials and employees of state-owned firms such as KEPCO; 40 HAC
staff; nine supervisors for cafeterias and other convenience shops
and a medical center in the KIC; and, 800 managers working for KIC
firms. The 880 South Koreans were authorized to stay in KIC for
only a week per visit (previously two weeks). South Koreans are
also prohibited from carrying any South Korean newspaper into KIC, a
practice previously allowed. The MOU official said that the KIC
firms may experience management disruptions, logistical constraints
and other difficulties due to the restrictions.

15. (U) In the meantime, the South Korean firms in the KIC will ask
the South Korean government to compensate them for their losses if
inter-Korean relations continue to deteriorate. About 130 South
Korean firms at KIC say that their sales dropped by 60 percent in
November due to escalating tensions between the two Koreas. Experts
agree that closing down of theKIC could seriously hurt the
investment environment in North Korea.

16. (U) October Inter-Korean Trade Falls 23% to USD 160 Million:
MOU said November 23 that inter-Korean trade in October this year
dropped 23 percent year-on-year to a total of USD 160 million,
mainly due to worsening ties between the two Koreas. It was the
first time that inter-Korean trade recorded such a reduction on a
yearly basis in recent months. An MOU official suggested that other
factors were also involve: "The reduction in inter-Korean trade
appears to reflect the economic recession in South Korea including
depreciation of the won against the US dollar and the suspension of
Mount Geumgang tour."

17. (U) KEPCO Loses USD 14 Million on KIC Electricity Supply over
Four Years: Kim Ki-hyun, a lawmaker from the ROK's Grand National
Party, quoted materials presented by the Ministry of Unification on
October 16 that Korea Electric Corporation (KEPCO), South Korea's
electricity monopoly supplier, has lost 14 billion won
(approximately USD 14 million) for electricity supply for the
Kaesong Industrial Complex (KIC) over the last four years, 29

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percent of it in just the first nine months of this year. KEPCO
supplied KIC with 7,131 MWh in 2005, 28,157 MWh in 2006, 45,574 MWh
in 2007 and 50,733 MWh through September of 2008 at subsidized
rates. The low prices were set at the request of the South Korean
government.

18. (U) Number of South Korean Tourists to DPRK Plunges 88 Percent
in September: Due to stalled inter-Korean relations, the number of
South Korean tourists to North Korea was down by 88 percent in
September this year over the same month a year ago. The total
number of South Korean tourists to North Korea (Kaesong) in
September was 5,206 persons; the popular Mount Geumgang tour was
suspended in July following the killing of a South Korean tourist.

19. (U) A ROK Chicken Franchise in Pyongyang Succeeds: Choi Won-ho,
President and CEO of Mattdaero Chondalk (Delicious Country Chicken)
told Yonhap News Agency in late October that the Rakwon Chicken
Restaurant, a joint venture chicken home delivery with North Korea's
Rakwon General Trading Company, is doing good business since its
opening in Pyongyang in June this year. Choi said that the
restaurant's monthly sales turnover amounted to 18,000 Euro (USD
22,300). Turnover is approximately 100 chickens per day, Choi said.
Chicken is sold at a price similar to that in South Korea (USD 11),
which is expensive when contrasted with North Korean workers'
average monthly income of USD 20-40.

Foreign Trade and Investment
----------------------------

20. (U) Japan Extends Economic Sanctions against DPRK; More Actions
Possible: The Korea Trade and Investment Promotion Agency (KOTRA)
quoted Sankei Shimbun on November 12 as saying that the Japanese
government has recently extended economic sanctions against North
Korea for six months. In addition, the Japanese main opposition
Democratic Party said on November 5 that the Party would adopt a
bill of additional economic sanctions against North Korea. The bill
consists of 14 provisions including restriction of exchanges of
goods, personnel and cash. The bill would also have Japan designate
North Korea as a state sponsor of terrorism.

21. (U) DPRK Reportedly Bans Chinese/Russian Goods from State-run
Stores in 2009: RFA quoted a Japanese source in late October
indicating that North Korean authorities announced a ban on sales of
Chinese and Russian goods at state-run shops from next year.
According to the notice, state-run shops in North Korea will be
allowed to sell only North Korean agricultural products, fishery
goods and goods processed for re-export. RFA also cited Chinese
traders doing business with North Korea as saying that currently
around 90 percent of industrial goods, food and daily necessities
sold in the North are imported from China.

22. (U) DPRK-Kuwait Sign an Air Service Agreement: KCNA reported in
late October that North Korea and Kuwait signed an air service
agreement. Jong Ho, the North Korean Ambassador to Kuwait, and
Fawaz Abdul Aziz Al-Farah, chairman of the General Council of the
Civil Aviation of Kuwait, signed the agreement. North Korea
currently operates direct air service with China, Russia and
Thailand. The report did not contain specifics on whether the
countries anticipate the initiation of scheduled air service.

23. (U) Air Koryo Plans to Replace Aircraft to Compete with Air
China: RFA quoted a Chinese tour agency that jointly operates North
Korea tour programs as saying that North Korea's Air Koryo
reportedly plans to replace some of its aircraft with Illyushin
II-96 or Sukhoi Super Jet 100s. Air Koryo already bought one
Tupolev-204 last December. The Chinese company said that Air
Koryo's planned move is intended improve competitiveness with Air
China on the Pyongyang and Beijing route. The new aircraft are
reportedly to be equipped with business-class seats, LCD display
screens and music players for passengers. North Korea has already
replaced Russian airport buses.

24. (U) Refurbishment of Rajin-Khasan Railway Link Begins: North
Korea and Russia held a ground breaking ceremony to refurbish
Rajin-Khasan railway link in October. Representatives from the
Russian Railway Corporation and North Korea's Rajin Port Management
Company, and North Korea's Railway Ministry together with foreign
diplomats from Britain, Germany, Czech Republic, India and Mongolia

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were present at the ceremony. Chosun Sinbo, a pro-North Korea
newspaper based in Japan quoted Vladimir Yakunin, president of
Russian Railway Corporation, on October 14 as saying that the
Rajin-Khasan railway will be able to transport 35,000 containers in
2011, 70,000 containers in 2012, and 100,000 containers in 2013
respectively. Bae Ho-chol who is responsible for running the Rajin
port in North Korea gave a very different set of numbers to Chosun
Sinbo -- 200,000 containers as of end of October 2010 when the
container terminal of the port is completed. He added that the new
port terminal will be able to handle up to 400,000 containers.
South Korea's Railway Corporation and a consortium consisting of
several logistics firms have decided to invest 40 percent stakes in
the DPRK-Russia railway project as the project is evaluated as a
profitable one unlike other investments in the North, Dr. Ahn
Byung-min at Korea Transport Institute said.

25. (U) MasterCard Will Not Enter DPRK: RFA reported October 22
that MasterCard International Corporation will not enter the North
Korean market due to the lack of a financial system. MasterCard
said it would consider exploring the North Korean market if its
financial organizations and system are developed to handle credit
card business. China's Koryo Tour Agency that runs North Korea tour
programs said that many foreign tourists visiting North Korea
reportedly wish to pay with credit cards there.

STEPHENS

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