South Korea Defence and Security Report Q2 2009

North Korea's recently-announced intention to launch an ‘experimental communications satellite Kwangmyongsong No 2’ some time between April 4-8 this year has started up an international slanging match between the two countries on the divided peninsula. South Korea condemned the announcement as provocative, and suspects the launch may be a cover for testing its long-range Taepodong-2 missile that can theoretically reach Alaska. Meanwhile, the North defended itself and seized on comments made by US National Intelligence Director Dennis Blair that it construed as acknowledgment of their satellite launch preparation However, the North ignored the concerns expressed by Blair, who said the technology involved in a space-launch vehicle ‘is indistinguishable from the intercontinental ballistic missile’. North Korea test-fired a Taepodong-2 missile, which crashed soon after takeoff, in July 2006.

Seoul and Washington have one of the longest running military alliances in the world, and about 28,500 US troops are stationed there as a deterrent against North Korea. South Korea plans to regain wartime operational control of its estimated 680,000 troops from the US in 2012.

In October 2008, the US government removed its counterpart in North Korea from its list of ‘State Sponsors of Terrorism’. This was in response to the North Korean government’s acceptance of a new protocol for the verification of facilities that have the potential to process uranium and plutonium.

However, by the end of November, it was unclear what would be the next development in North Korea’s negotiations with the other five countries that are participating in the five-party talks. The North Korean government announced restrictions on the passage from South Korea to the Kaesong industrial zone across the border in North Korea. The North Korean government had also previously announced that foreign inspectors would not be allowed to verify the dismantling of the nuclear facilities in Yongbyon.

North Korea remains in a technical state of war with the US and South Korea after the 1950-53 Korean War ended in a ceasefire rather than a peace treaty. North Korea may hope it can drive a wedge between the US and South Korea, as President Lee Myung-bak appears to have more in common with President Obama's predecessor in terms of his hard-line approach, age, conservatism and devout Christianity, rather than with Obama himself, and his more pro-engagement policy with Pyongyang However, in a show of US-South Korea solidarity, in February 2009, a three-day journey by a delegation of 12 members of the US Armed Services Committee of Congress coincided with the two-day visit by US Secretary of State Hillary Clinton, who began her four-nation Asian trip with a warning to North Korea to stop what appears to be preparations for a long-range missile test.

In an attempt to kick-start an ailing economy, South Korea announced its intention to spend at least 60 percent of its budgeted defence expenditure in the first half of the current fiscal year. Additionally, more than 60 per cent of the ministry's budget for next year is earmarked for domestic purchases. The number of armed forces conscripts who will be permitted to undertake their compulsory military service in export-related defence industry positions will be increased. While South Korea's exports held up unexpectedly well for much of 2008, they hit a brick wall in November with export growth dropping from 8.5% y-o-y in the preceding month to -18.3%, as shipments to China and the US fell sharply. Slumping external demand has had a devastating effect on sentiment among South Korean corporations, with the business confidence of the country's manufacturers falling to a 10-year low in December 2008, matching the expectations held in Q398 when South Korea was in the midst of the Asian financial crisis. We are now cutting our 2009 real GDP growth forecast from 3.0% to 1.5% on the back of a sharper than anticipated slowdown in exports amid government efforts to resuscitate moribund domestic demand.