Twin Deficits in 25 Years... Realized Stagflation (Comprehensive)

Due to a Surge in Raw Material Imports,
Import Growth Outpaces Exports
Fiscal Deficit Expected to Reach 110 Trillion Won This Year

[Image source=Yonhap News]

[Asia Economy reporters Seo So-jeong and Moon Je-won] South Korea's current account balance recorded a deficit of 80 million dollars in April, breaking a two-year streak of surpluses and raising warning signals for the Korean economy. Amid the prolonged Ukraine crisis and persistent high inflation, economic growth has also slowed, intensifying fears of stagflation.

According to the Bank of Korea on the 10th, the 80 million dollar deficit in the current account in April was due to a larger increase in imports than exports, driven by a surge in raw material imports. Exports showed a solid trend centered on semiconductors, petroleum products, and chemical products, increasing for 18 consecutive months compared to the same month last year. However, the surge in raw material imports reduced the goods trade surplus by 2 billion dollars compared to the same month last year. In particular, based on April customs clearance data, the import growth rates for raw materials such as coal, gas, crude oil, and petroleum products were 148.2%, 107.3%, 78.4%, and 36.0%, respectively.

April is also a factor in the deterioration of the current account because it is the overseas dividend period for corporations with December fiscal year-ends. Due to recent shareholder-friendly policies, dividends paid to foreign investors increased, resulting in a dividend income account deficit of 3.82 billion dollars. The dividend income account is the amount obtained by subtracting dividends received by foreigners domestically from dividends received by Koreans overseas.

The service account, which was a deficit factor, managed to perform well by turning from a deficit of 130 million dollars in the same month last year to a surplus of 570 million dollars, thanks to improvements in the transportation account. The net financial account (assets minus liabilities) increased by 1.7 billion dollars in April. In direct investment, Koreans' overseas investment increased by 5.7 billion dollars, and foreigners' domestic investment increased by 80 million dollars. In securities investment, Koreans' overseas investment increased by 7.2 billion dollars, but foreigners' domestic securities investment decreased by 1.69 billion dollars.

Although the current account showed a temporary deficit in April due to seasonal factors, the Bank of Korea expects an annual surplus of 50 billion dollars. Kim Young-hwan, head of the Bank of Korea's Financial Statistics Department, said, "In May, the customs-based trade balance recorded a deficit of 1.71 billion dollars, but since adjustments are made for items such as ships, freight insurance, and overseas production exports when compiling the international balance of payments, the deficit cannot be seen as continuing." He added, "Thanks to the transportation account, the service account is expected to maintain a surplus trend, and the dividend factor from April will ease, so the current account is likely to return to surplus in May."

However, concerns are rising about the entrenchment of twin deficits, where both the fiscal balance and current account balance fall into deficit, as the trade balance, which accounts for a significant portion of the current account, is unstable. The integrated fiscal balance recorded deficits for three consecutive years from 2019 to last year, and this year's management fiscal balance (based on the second supplementary budget) is projected to be a deficit of 110 trillion won. Kim Jung-sik, professor emeritus at Yonsei University, said, "Twin deficits mean that the Korean economy's resilience has weakened," expressing concerns that "it could significantly lower external credibility." Sung Tae-yoon, professor of economics at Yonsei University, said, "If the current account deficit continues, there is a risk of capital outflow and it could be a factor in exchange rate increases."

With growth slowing and recent high inflation continuing, fears of stagflation are also growing. According to Statistics Korea, among the 458 items surveyed for the consumer price index last month, 93 items, or 20.3%, had price increases of 10% or more. This means that one out of every five items surveyed last month showed double-digit price increases compared to a year ago.

Bank of Korea Governor Lee Chang-yong strongly hinted at further interest rate hikes in his 72nd anniversary speech, stating, "As global inflationary pressures are expected to persist for a considerable period, the central bank's fundamental role as an 'inflation fighter' is becoming important again."

This content was produced with the assistance of AI translation services.