South Korea's Trade Balance Turns Surplus, 'Strong Dollar and High Exchange Rates' Expected After Next Year... Cautious Warning for KOSPI on Thin Ice

[Asia Economy Reporter Lee Seon-ae] As South Korea's trade deficit continues to accumulate, the turnaround to a surplus is expected to be delayed until after 2023, which is likely to have a direct impact on the KRW-USD exchange rate. Consequently, the domestic stock market is also expected to be significantly affected, prompting recommendations for a conservative response strategy.

According to the financial investment industry on the 29th, the domestic stock market is expected to remain sluggish for the time being, as it faces the "hawkish claw shock" from Federal Reserve (Fed) Chair Jerome Powell, who has expressed a strong commitment to maintaining a high-intensity interest rate hike policy to curb inflation, while also focusing on the upcoming release of South Korea's August trade balance statistics scheduled for the 1st. An increase in the trade deficit reduces the inflow of US dollars into the country, raising the value of the dollar and pushing the exchange rate higher, which inevitably has a negative impact on the stock market. The problem is that expectations are growing that South Korea's trade deficit, which has been recorded for four consecutive months since April, will not turn into a surplus until after 2023.

The main causes of South Korea's trade deficit are cited as significantly lowered inventory ratios and increased international oil prices. During the recovery process from the COVID-19 pandemic, domestic manufacturing inventories were rapidly depleted, leading to increased import demand to replenish them. Additionally, the international oil price (WTI basis), which hovered around $71 per barrel on average in December last year, rose to an average of $114 per barrel in June 2022, directly impacting the rise in export and import unit prices. For South Korea, which has a high proportion of raw material imports, the rise in international oil prices and the weakening of the Korean won led to increased import costs, expanding the trade deficit.

Kim Hyo-jin, an economist at KB Securities, said, "Although the international oil price, which was a major cause of the deficit, has fallen to around $90 per barrel and corporate inventories have expanded, which is positive for the trade balance, the likelihood of a continued trade deficit in the near term is high." She pointed out, "The recent decline in international oil prices has not been sufficient to lead to a trade surplus turnaround, and with the expansion of LNG demand and sharp price increases acting as factors for overall import growth, coupled with a slowdown in demand from major countries, the export growth rate in the second half is likely to slow down." She forecasted the trade surplus turnaround to occur after next year.

Kim added, "To estimate the timing of the trade surplus turnaround, we analyzed the impact of international oil prices on export and import unit prices from 2001 to the present. A 10% change in international oil prices results in about a 2% change in export prices and about a 3% change in import prices." She noted, "If the average international oil price in August is around $91 per barrel, the trade deficit will persist but shrink significantly to about $30 million, and if the monthly average international oil price falls to the $80 per barrel range, a trade surplus turnaround is possible." She continued, "The recent decline in international oil prices has stalled, and with the simultaneous occurrence of slowing export growth and rising LNG prices and demand-driven import increases, the timing of the trade surplus turnaround is likely to be delayed until after 2023."

Accordingly, as the stock market may experience fluctuations, securities firms advise maintaining a defensive portfolio and strengthening vigilance. Kim Young-hwan, a researcher at NH Investment & Securities, said, "As the Fed continues to reduce liquidity and the real economy feels the impact of interest rate hikes, a bear market characterized by earnings declines may emerge in the stock market." He recommended, "Maintaining a defensive portfolio focused on structurally growing stocks unrelated to the economy, policy beneficiaries, and defensive stocks is advisable."

Another burden is the expected start of a decline in corporate earnings from the third quarter. Mirae Asset Securities forecast that the total operating profit of domestic listed companies in the third quarter will decrease by 8.8% compared to the same period last year. Even excluding the semiconductor sector, a contraction of 5.6% is expected. The consensus estimate for third-quarter operating profits of listed companies (average of securities firms' estimates) has been revised downward by 4.9% over the past month.

Labor Analyst Roh Dong-gil of Shinhan Financial Investment advised, "In September, sector strategies will be more important than the index." He added, "It is worth paying attention to sectors that can project 2023 earnings and gas-related defensive stocks that can hedge energy volatility."

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