hankyoreh

Monitors in Hana Bank’s dealing room in downtown Seoul display the KOSPI and won/dollar exchange rate on Sept. 7. (Yonhap)

Alarm bells are ringing for South Korea’s current account balance, a key indicator of Korea’s commercial health. The trade deficit has been driven up by the soaring exchange rate and the rising prices of crude oil and other imports, creating a good chance of a “structural deficit” in the current account balance. A persistent current account deficit could spell trouble for the Korean economy overall by destabilizing the exchange rate.

Provisional statistics for the balance of payments announced by the Bank of Korea on Wednesday show that Korea had a current account surplus of US$1.09 billion for July 2022, down US$6.62 billion from July 2021. That was the biggest year-over-year drop in the surplus in 11 years and two months, since May 2011 (US$7.9 billion).

That drop was driven by a large deficit in the balance of goods (the difference between exported and imported goods, the largest component of the current account balance) as the cost of importing raw materials in the energy sector, including crude oil and coal, has spiked.

Given the big deficit (US$9.47 billion) in the trade balance for August, the Bank of Korea says it’s unclear whether the country can maintain a surplus in the current account balance for the month.

The Korean government has expressed confidence in the current account balance despite a record-setting deficit in the trade balance, which is tracked by the Korea Customs Service. The trade balance, which is based on customs clearance, gives less weight to export values and more weight to import values than the current balance.

But now the situation seems to be changing.

“Given the high uncertainty in the current account balance, which is a comprehensive indicator of foreign trade, there is likely to be major volatility from month to month for the time being. The current account surplus could shrink as the trade balance worsens because of the recent increase in international energy prices and sluggish global demand, including in China,” said Choo Kyung-ho, deputy prime minister and minister of economy and finance, in an emergency macroeconomy and finance meeting on Monday.

Korea can’t be confident about maintaining a current account surplus, Choo said, considering that import prices are soaring even as exports are only rising at a single-digit pace despite the high exchange rate.

To be sure, it’s generally thought that switching to a current account deficit on a monthly basis wouldn’t have a major impact on the Korean economy right away. Considering that Korea has the world’s ninth-largest foreign exchange reserves and has maintained an annual current account surplus for the 25 years since the Asian financial crisis in 1997 (when it had a current account deficit of US$10.81 billion), Korea is unlikely to face a foreign debt crisis.

The problem is the possibility of persistent weakness in the current account balance.

The Bank of Korea noted in a report published Wednesday titled “A Review of High Inflation Sustainability” that there are “expectations that the inflation rate in major countries will crest in the second half of the year and then gradually slow,” but also observed that “it remains possible that the upward trend in the price of goods will persist as the price of raw materials rebounds.”

The price of oil and other raw materials is likely to rebound, the central bank said, as Russia curtails the supply of natural gas to Europe and as petroleum inventories fall in major oil-producing countries. If the price of importing raw materials surges once again, the goods deficit could widen, causing the monthly current account balance to remain at a deficit for the time being.

“While a current account deficit wouldn’t immediately lead to a crisis, it could have a negative impact on the economy as a whole by rattling the foreign exchange market, destabilizing the exchange rate and creating more uncertainty over economic activity,” observed Sung Tae-yoon, a professor of economics at Yonsei University.

By Park Jong-o, staff reporter

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