North Korea: Kim Jong Il-lness And Defaulted Debt
Is North Korean leader Kim Jong Il ailing? His absence from this week’s 60th anniversary parade – a major milestone in the North Korean calendar – certainly suggests this. The word is that he seems to have suffered a stroke, although on Friday, South Korea’s Yonhap News Agency reported that Kim had regained the ability to brush his teeth.
Why does all this matter? The answer is that North Korea is something of an economic black hole in one of the most economically pivotal parts of the world – the intersection of rapidly-growing China, Japan (still the second-largest economy in the world), and South Korea (a major industrial powerhouse). Any serious trouble in the North could lead to its collapse, followed by Chinese or South Korean troop deployments; potential civil war in a country armed with nukes and bio- and chemical weapons; and massive flows of refugees. In other words, there is a major security threat here. In practice, though, I believe that in the event of Kim’s removal, a military-dominated collective leadership would take power and maintain the status quo, at least in the near term.
So, what are the investment implications of all this? One very obscure security which I have been tracking for some time now is North Korean tradable debt certificates, which were created in 1997 by a group of European bankers to cover the country’s defaulted debt. In 1998, they were trading at 60 cents on the dollar on expectations that North Korea would collapse and be absorbed by the South, which would then honour its compatriots’ debt. However, by 1999, the debt had fallen back to only 7¼ cents on the dollar, according to Exotix Ltd of London. The accompanying chart shows the vicissitudes of the debt price in relation to key events. As you can see, the debt has now fallen significantly from a peak of 32 cents on the dollar in January 2008. This mainly reflects North Korea’s persistent stalling of its ‘denuclearisation’.
North Korean Debt Certificates (Source: Exotix Ltd)
As I have mentioned previously in Business Monitor Online, my own guess is that the debt instruments will rally only if things get really terrible or really good in North Korea. The former scenario would increase the chance of a South Korean takeover of the North (followed by debt repayment), while the latter might persuade Pyongygang finally to cough up, especially if it wants access to new international loans.
September 16th, 2008 at 11:40 am
How much do they owe, and how much gold bullion does Kim Jong Il plausibly have stashed away? Also what will happen to the debt price if he finally decides to fire missiles at Seattle:
http://afp.google.com/article/ALeqM5jrsMKE4PLN28EK-cYs9M18TdKqUA
September 16th, 2008 at 11:49 am
Also wouldn’t you consider that North Korea’s current assets are entirely Il-liquid? Perhaps I am being Il-logical. Could you Il-luminate me further on this Il-lusion of wealth?
September 16th, 2008 at 6:09 pm
The debt certificates cover a relatively small amount — less than US$500mn. Although this is quite a large amount for North Korea, repayment by the South would not be a problem. However, the debt certificates cover only a small fraction of North Korea’s external debt, which is thought to be more than US$15bn. Much of it is owed to Russia from the USSR days.
If North Korea launched a missile at Seattle, the US would respond in kind and probably obliterate the country. Under such circumstances, South Korea would take it over and repay the debt. So the certificates should go up in value, eventually.
Yes, it’s true that North Korea’s assets are ‘Il-liquid’. The North Korean won is only used locally and is considered worthless. There is no stock market. There are bonds, but these are given to people as part of their salary. Foreign investment is limited, and mainly comes from China and interestingly Egypt’s Orascom Group, which is setting up a mobile network.
As to Kim Jong Il’s wealth, it is said he personally controls his own conglomerate, as do top generals in the military.
September 6th, 2009 at 11:02 pm
I find this subject utterly fascinating. I have been looking all over the place on how in the world North Korea deals with its debt, and how investors react to it. Obviously, it is not favorable, but since the economy is one of the most secretive and closed on the planet, I was wondering how or why anybody would invest there. One notable company is supposedly Orascom. Rumor has it they are helping financing the resuming of the biggest eyesore in the DPRK, the Ryugyong Hotel. I saw the progress, and it seems it is getting at the least a nice facade. If it will be finished is unknown to me, but I found it utterly surprising after sitting there for 16 years.
Further, they made some cell phone deal and placed the equipment in the Ryugyong Hotel somewhere. I do not know if the rumors are true, but I guess it may make some sense they might want to do something with that hotel too…. in a weird, North Korean way.
What I do not understand is, how can the cell phone deal be a deal when most citizens cannot afford food let alone a cell phone? The answer may lie in the party elite, but that is a very small percentage of the population (perhaps 1%). I seriously doubt any answers will come about on these questions, but it is interesting to ask nonetheless.
Aside from these issues on individual deals, the debt certificates is something I never heard of before. Where can I get more information on how all of this works?