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Concerns over current account deficit

Posted September. 09, 2022 07:28,   

Updated September. 09, 2022 07:28


The Bank of Korea warned of a current account deficit in August. Unlike the trade balance that only accounts for imports and exports of goods, the current account balance is a sum of the imports and exports of both goods and services. A soaring price of oil and commodities has caused a trade balance deficit for five consecutive months, but the current account balance, which includes the value of exports and imports of both goods and services as well as transfers of capital, have maintained surplus until recently; however, the country’s current account surplus is shrinking sharply. It was just a week ago when President Yoon Suk-yeol reassured the public by saying that this year’s current account surplus is likely to exceed 30 billion dollars.

The current balance surplus in July decreased by 85 percent from the previous year, owing to unbearably large trade deficit that is hard to be balanced out by other sectors. South Korea ran a trade deficit of 9.47 billion dollars in August, the highest-ever figure. There are no signs of recovering anytime soon, as the global semiconductor industry is facing downturn and the growth of China, South Korea’s biggest trading partner, has slowed down. Dividends and interests from foreign investments are decreasing due to global stock market recession, and once overseas travel gets underway, the country’s travel balance is likely to turn negative.

A current account balance is one of the key barometers for the strength of national economy. A fiscal deficit and a current account deficit are together referred to as the ‘twin deficits,’ against which the country must guard itself. South Korea, with a national debt already in excess of 100 billion won, may see a downgrade of its sovereign credit rating. With the U.S. interest rate hike in combination with the weakness of the Korean economy, the depreciation of won against dollar, which is much greater than Japan’s yen, China’s yuan, and EU's euro, is attributable to strong demand for dollar.

What is more worrisome is a fundamental shift in the way Korean economy has grown, including its relations with China, which accounted for one-fourth of the country’s trade and 80 percent of the country’s trade surplus. Except the semiconductor business, China has narrowed its gap with South Korea in smartphone and display manufacturing. On the other hand, Korea is inevitably dependent on imports from China for raw materials for making batteries for EVs.

Contrary to the government’s hope on decrease in the price of oil and other commodities, the war in Ukraine is nowhere close to an end, and the stabilization of oil prices would not immediately bring the deficit down to the original state. Before it is too late to turn back, the government must increase its exports of high value-added products, pursue sophistication of services industry, and diversify its trading partners. Without fundamental overhaul of the Korean economy’s growth strategy, a crisis may occur at any time.