[News analysis] S. Korea reports 2 straight months of trade deficit; a first in 14 years

Posted on : 2022-02-03 16:33 KST Modified on : 2022-02-03 16:33 KST
South Korea recorded a US$4.89 billion trade deficit in January
Ships loaded with freight containers can be seen docked at Busan Port in South Korea in this undated file photo. (Yonhap News)
Ships loaded with freight containers can be seen docked at Busan Port in South Korea in this undated file photo. (Yonhap News)

After moving into the red for the first time in 20 months last December, South Korea’s trade balance reached a record deficit of US$4.89 billion during the first month of 2022.

It’s the first time in the 14 years since the global financial crisis of 2008 that South Korea has recorded a trade deficit for two straight months.

Analysts are predicting that the prospects for an annual trade surplus are in jeopardy, with the recent downgrading of the economic outlook for major export markets in the US and China, as well as a sustained increase in prices of crude oil, gas, coal, and other energy sources, which have a major impact on imports.

According to an examination of Korea Customs Service figures Wednesday, South Korea’s trade balance moved into the red in December at US$450 million.

While exports have continued to grow, they have been outpaced by an ever-greater rise in imports. At US$55.42 billion, January exports were up by 15.2% from the same month in 2021 — but the US$60.21 billion in exports recorded for the same month were up by more than double that rate at 35.5%.

With the rise in imports far outpacing the increase in exports, the trade balance remained in the minus column for a second straight month.

The South Korean government predicted earlier that the rate of increase in exports would gradually drop off this year, while the rate of increase in imports would remain higher. At the same time, it did not predict that the balance of trade itself would be negative.

In a 2022 economic outlook report published by the Ministry of Economy and Finance (MOEF) in December, the administration predicted that the “scale of the current account balance surplus will shrink to some extent as imports grow at a larger rate than exports.”

In its prediction, it gave a current account balance surplus of US$80 billion, down by US$11 billion from the year before. The current account balance is an indicator that includes imports and exports of services as well as goods.

South Korean government hopes to be in the black by springtime

On this basis, the administration is predicting that the large rise in the trade deficit for January may be a one-off phenomenon.

“Due to seasonal factors such as winter gas demand, we’re expecting the deficit to continue through February before returning to a surplus in March,” a MOEF official said.

“The export outlook is bright, with growing imports of semiconductor equipment and materials,” they added, referring to a leading indicator for exports. The expectation is that the trade balance will reach a surplus once again come spring.

But it remains to be seen whether actual import and export trends follow that script in 2022.

To begin with, the explosive rise in energy imports that helped drive the December and January trade deficit cannot be attributed to seasonal factors alone.

The combined US$15.95 billion value last month of imports of the three major energy sources — crude oil, gas and coal — was 2.3 times higher than for the same month in 2021. The sharp rise in crude oil and other energy prices since last fall reflects structural factors including geopolitical uncertainties surrounding Russia, growing international support for a post-carbon era, and the attendant speculative demand.

This suggests a strong likelihood that the cost of energy imports will remain high for some time, acting as a continued drag on the trade balance.

Downgraded economic outlooks for US, China

In terms of exports, new variables have also been emerging.

New forecasts are predicting slower-than-expected growth rates for the Chinese and US economies, which accounted for more than 40% of South Korea’s exports as of 2021.

On Jan. 25, the International Monetary Fund lowered its projection for this year’s global economic growth rate to 4.4%, down by around 0.5 percentage points from three months earlier. In the case of South Korea’s major export markets, the projected growth rates for the US and China were down by 1.2 and 0.8 percentage points respectively to 4.0% and 4.8%.

The decreases reflect new variables that have arisen over the past three months: forceful COVID-19 response measures in China’s case, central bank austerity measures and the prospect of a large-scale budget failing to clear Congress in the case of the US.

“The export outlook for semiconductors remains positive, but automobiles could face continued difficulties through the first half of the year due to facts such as a shortage of components,” predicted Joo Won, director of economic research at the Hyundai Research Institute.

“I don’t expect the annual trade balance this year to be negative, but I doubt it will be as high as last year,” he said.

Despite an all-time high of US$644.5 billion in exports, South Korea’s trade balance surplus last year was its smallest since 2012 at US$29.4 billion — down by a full 34.4% from a year prior.

Will Korea record an annual trade surplus in 2022?

With the value of the won falling amid the effects of US retrenchment measures, some are predicting the foreign exchange market will not have much of a positive impact on exports. Typically, a decline in the won’s value leads to increased export volumes and value as it boosts the price competitiveness of export products.

“While a high exchange rate [weaker won and stronger US dollar] tends to boost export competitiveness, it doesn’t seem to have been much help lately,” said Lee In-ho, a professor of economics at Seoul National University.

“If anything, it could raise the risk of inflation as import prices rise, and that combined with decreased consumption could have a [negative] result that is even more damaging to irregular workers and self-employed small business operators,” he noted.

By Lee Jeong-hun, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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