Twin Deficits Approaching... Korean Economy on Alert

US and Major Economies' Slowdown Becomes Visible
Continued Instability in International Commodity Prices
Current Account Surplus Maintained for Three Months
Growing Concerns Over Negative Turn Next Month
Need to Cut Unnecessary Fiscal Spending
Efforts Required to Stabilize Exchange Rates

[Image source=Yonhap News]

[Asia Economy reporters Seo So-jeong and Moon Je-won] Amid accumulating trade deficits, the fear of a "twin deficit"?where both the fiscal balance and the current account balance are in deficit?is becoming a reality as the goods balance, which accounts for a large portion of the current account, has also turned negative. South Korea's current account maintained a surplus for 23 consecutive months from May 2020 through March this year but recorded a deficit in April due to a surge in imports and overseas dividends. After successfully returning to a surplus in May, it has maintained a surplus trend for three consecutive months. However, with the economic slowdown in major countries such as the United States, China, and Europe becoming apparent, and ongoing instability in international raw material prices, it is expected that not only the goods balance but also the current account will turn negative as soon as next month.

The goods balance turned to a deficit in July for the first time since April 2012 because exports of South Korea’s key products slowed while imports, including raw materials, increased significantly. According to the Bank of Korea, exports increased by only 9.1% and 6.9% in the past two months compared to the same months last year, whereas imports rose sharply by 18.9% and 21.2%. In fact, the deterioration in the trade balance due to rising import prices (-$86.7 billion) until last month was more than twice the improvement in the trade balance from rising export prices ($39.5 billion). The slowdown in exports of key items such as mobile phones, displays, and ships, combined with increased raw material imports and sluggish exports to China and Europe, caused a greater impact compared to the past.

The problem is that this trend could continue for a considerable period. Since the domestic trade balance has been in deficit for five consecutive months, the goods balance deficit may widen further, potentially dragging down the current account balance as well. Kim Young-hwan, head of the Financial Statistics Department at the Bank of Korea, said, "The trade balance in August recorded the largest deficit ever, which will affect the goods balance. While we need to consider the services and income balances, there is a possibility of a current account deficit reversal." The government has reassured the market by emphasizing that the goods balance remained in surplus despite the trade deficit, but if the goods balance also accumulates deficits, concerns about economic slowdown are expected to intensify.

Experts have expressed concerns that South Korea’s economy could face a "twin deficit" crisis, as the integrated fiscal balance is also expected to be in deficit this year. Kim Jung-sik, emeritus professor of economics at Yonsei University, said, "The managed fiscal balance deficit in the first half of this year increased by 22 trillion won from last year to 101 trillion won. Fiscal balance and trade balance are important factors determining the country’s external credibility." He added, "The government should reduce unnecessary fiscal spending and enhance South Korea’s external credibility to stabilize the exchange rate." Ha Joon-kyung, professor of economics at Hanyang University, said, "With various external variables at play, if exports to China decline sharply and the U.S. tightens import regulations on China, South Korea’s trade deficit could expand further, leading to a twin deficit crisis."

The Bank of Korea expects volatility in the current account to increase going forward but anticipates maintaining an annual surplus trend. Im In-hyuk, head of the International Balance of Payments Team at the Bank of Korea’s Economic Statistics Bureau, said, "Twin deficits should be viewed on an annual basis, not monthly. Although there may be a temporary deficit in the current account in August, the annual surplus will be maintained." However, the biggest variable for the current account in the future is energy prices. Im added, "Although international oil prices have recently been declining, it is too early to consider them stabilized. Because there is great uncertainty about where energy prices will move, monthly volatility in the current account may increase."

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