Concerns Over Investment Sentiment Weakening Amid Twin Deficits Becoming Apparent

Energy Price Surge Major Cause of Deficit
Increased Corporate Cost Burden...Profits and Export Momentum Under Pressure
Trade Deficit Cited for Won Weakness
Negative Impact on Domestic Stock Market Sentiment
Low Likelihood of Long-Term Trade Deficit Continuation

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Concerns are emerging that domestic investment sentiment could shrink following the possibility of a 'twin deficit' (current account deficit + fiscal deficit) being raised due to a large-scale trade deficit in January this year. The cause of this trade deficit is attributed to rising raw material and energy prices, with analysis suggesting that cost burdens are increasing more than corporate growth.

On the 4th, Hi Investment & Securities analyzed, "Whether domestic trade conditions improve based on the stabilization of raw material prices will be an important variable in improving the twin deficit risk and the rebound of the stock market."

The Ministry of Trade, Industry and Energy announced on the 2nd that the trade balance for January recorded a deficit of $4.89 billion. The scale of the trade deficit in January this year is the largest ever on a monthly basis. Notably, recording a deficit for two consecutive months following December last year is the first time in 14 years since the 2008 global financial crisis. The main cause of the January trade deficit is the sharp increase in import costs due to rising energy prices. Although the current account balance remains in surplus, considering the scale of the January trade deficit, there is a high possibility that the current account balance for January will also turn to a deficit, making the possibility of a 'twin deficit' more visible.

The securities industry is tense because this could act as a negative factor for the stock market. Park Sang-hyun, a researcher at Hi Investment & Securities, pointed out, "If the Russia-Ukraine conflict expands into a full-scale form, prolonged sharp rises in oil prices and export slowdowns could expand the trade deficit. When domestic trade conditions worsen, momentum in both the economy and the domestic stock market has previously weakened, and a similar trend is appearing this time as well." He added, "If oil prices surge and raw material prices rise, corporate costs increase, margins shrink, and export momentum weakens, which can also impact the stock market."

The trade balance being a major variable for currency value is also a risk. Jeong Won-il, a researcher at Yuanta Securities, said, "If the scale of South Korea's trade deficit expands, it acts as a factor weakening the KRW/USD exchange rate. Although the KRW/USD exchange rate has exceeded 1,200 won since the beginning of the year due to various reasons such as volatility in monetary policy, the ongoing trade deficits since December are thought to have a significant impact." This means that the reduction of dollars flowing into the country has a more negative effect on the domestic financial market than the increased export competitiveness caused by a high exchange rate.

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