Current Account Deficit Surrounded by 'Negative Factors'... Energy Price Volatility and Weak Exports to China (Comprehensive)

Sharp Decline in Exports of Key Items like Semiconductors
Surge in Imports of Raw Materials such as Gas and Crude Oil
Trade Deficit Expected to Worsen Due to Accumulated Losses

[Asia Economy reporters Seo So-jeong and Moon Je-won] Although the current account surplus in September barely turned positive at $1.61 billion, the trade deficit continued for the seventh consecutive month, casting a shadow over the economic outlook. Exports, which had increased for 23 consecutive months, reversed to a decline for the first time in two years, and exports of key items such as semiconductors sharply dropped, signaling a red alert. The ongoing uncertainty surrounding the Ukraine crisis, coupled with expanded volatility in energy prices and sluggish exports to China, has piled up negative factors, heightening the sense of crisis.

◆ Export Warning Lights Due to Global Demand Contraction = The fact that exports, the backbone of the Korean economy, turned to a decline for the first time in 23 months since October 2020 is a concerning point. Based on customs clearance data, exports to China (-6.5%), Southeast Asia (-3.0%), and the European Union (-0.75%) were sluggish. The decline in re-export net exports and overseas exports (processing trade), which showed good performance until the third quarter, due to the IT industry downturn and global demand slowdown, is also a worrying factor. The sectors with a high share in re-export net exports and processing trade are smartphones, displays, and semiconductors, making the impact of the upcoming economic downturn inevitable.

On the other hand, raw material imports increased by 23.5% compared to the same month last year. Among raw materials, the import growth rates (based on customs clearance) for gas, crude oil, and coal were 165.1%, 57.4%, and 32.9%, respectively. Capital goods imports such as transportation equipment (23.7%) and semiconductors (19.2%) increased by 10.6%, and consumer goods imports such as grains (38.1%) and passenger cars (24.2%) also rose by 13.0%.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "Our exports are greatly influenced by the Chinese economy, and the ‘Zero COVID’ policy currently implemented in China is political in nature, so the uncertainty is inevitably high. Not only exports but also the rise in energy import prices is a bigger problem, and since there are less than two months left this year, the risks will continue into next year."

◆ Annual Target Achievement Not Easy = Although the current account turned to a surplus after a month, the worsening export environment suggests that achieving the annual target will not be easy. The Bank of Korea initially lowered the annual current account surplus target from $50 billion at the beginning of this year to $37 billion in August, but the recent sharp decline in the current account surplus makes even this difficult to achieve. Considering the cumulative current account surplus of $24.14 billion from January to September this year, a monthly average surplus of $4.29 billion must be maintained over the remaining three months to meet the target. However, given that the trade balance for October recorded a deficit of $6.7 billion, it will be difficult to further increase the goods balance surplus.

Hwang Sang-pil, director of the Economic Statistics Bureau at the Bank of Korea, said, "Adjustments such as ship adjustments, processing and re-export trade, and marine insurance premiums need to be made in the customs-based trade balance, but since basic data is still insufficient, it is difficult to predict the direction of the current account for October. Whether the annual target will be met will be announced on the 24th by the Bank of Korea’s Research Department, reflecting external conditions."

Re-export trade, which had greatly contributed to the goods balance surplus, has recently slowed, and the easing of COVID-19 quarantine measures is expected to reduce the travel balance, which will also weigh on the current account. The travel balance deficit narrowed from $970 million in August to $540 million in September, due to seasonal factors such as the summer vacation period. While the number of departures decreased from 700,000 in August to 620,000 in September, the easing of quarantine measures is increasing departures, so the travel balance deficit is expected to continue for the time being.

Experts believe that with sharp interest rate hikes and slowing growth in major countries such as the U.S., the economy will face more difficulties next year, potentially worsening the accumulated trade deficit. Professor Kang Sung-jin of Korea University’s Department of Economics said, "It is more dangerous when the trade balance runs a deficit as exports decline, and due to factors such as the semiconductor industry downturn and China’s economic slowdown, the economic situation is likely to remain poor next year. Long-term efforts to improve the non-trade balance are necessary."

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