Shrinking Exports to China Due to Semiconductor Slump... Largest Current Account Deficit (Comprehensive)

$4.52 Billion Deficit in January
Largest Since 1980

Goods Trade Deficit for 4 Consecutive Months
Exports Decline for 5 Months
Impact of Semiconductor and China Slump

In January of this year, the current account and goods account deficits reached the largest levels since statistics began in 1980, casting a shadow over the South Korean economy. Due to the global economic slowdown and the resulting export slump in semiconductors and other sectors, the goods account sharply declined, causing the current account to return to a deficit within a month.

According to the provisional balance of payments for January released by the Bank of Korea on the 10th, the current account recorded a deficit of $4.52 billion. This is a decrease of $6.77 billion compared to a surplus of $2.24 billion a year earlier. The goods account shifted from a surplus of $1.54 billion in the same month last year to a deficit of $7.46 billion.

By detailed category, the goods account showed a deficit for four consecutive months, the first time since a 16-month deficit streak from January 1996. Exports amounted to $48 billion, down by $8.38 billion (14.9%) compared to the same month last year. Exports have declined for five consecutive months due to the global economic slowdown affecting semiconductors, steel products, and others. In particular, semiconductors (customs basis -43.4%), steel products (-24.0%), and chemical products (-18.6%) showed weakness. By region, exports to China (-31.4%), Southeast Asia (-27.9%), and Japan (-12.7%) contracted.

Lee Dong-won, head of the Financial Statistics Department at the Bank of Korea's Economic Statistics Bureau, said, "The record deficit in the goods account is the result of simultaneous weakness in semiconductors, the largest export item, and China, the largest trading partner." He added, "During past global financial crises when major advanced economies' growth rates declined, South Korea managed well thanks to China's high growth, but this year is different."

The services account also recorded a deficit of $3.27 billion as the surplus in the transportation account shrank. The deficit in the services account widened by $2.44 billion compared to the same month last year. The transportation account posted a surplus of $120 million, but this was $1.77 billion less than a year ago.

The primary income account recorded a surplus of $6.38 billion, an increase of $4.51 billion compared to the same month last year. Among the primary income account, the dividend income surplus ($5.66 billion) increased by $4.55 billion in one year, as overseas subsidiaries of domestic companies remitted large dividends to their headquarters. The Bank of Korea explained that the increased surplus in the primary income account significantly offset the deficit in the goods account.

Regarding the outlook for the current account, Lee said, "The trade deficit in January was $12.69 billion, but it is expected to shrink by more than $7.3 billion to a $5.3 billion deficit in February, leading to a considerable improvement in the goods account for February." He forecasted, "Although semiconductor weakness continues, exports of secondary batteries and passenger cars are performing well, so the growth rate excluding semiconductors will turn positive."

With the easing of quarantine measures and an increase in Chinese arrivals, the services account is also expected to improve. The number of Chinese arrivals in January doubled compared to November last year, and with upcoming holidays such as China's Labor Day, group tourists are expected to increase. Additionally, Chinese tourists tend to spend a lot per person, and from March, overseas flight routes will expand, which the Bank of Korea expects will help reduce the deficit in the travel account.

However, the prolonged export slump and growing uncertainties surrounding the South Korean economy are becoming burdens for the economy.

Professor Ha Joon-kyung of Hanyang University’s Department of Economics said, "Since China has started reopening its economy, export demand may revive in the second half of the year." However, he expressed concern, saying, "But since China’s dependence on South Korea for parts and materials is not as strong as before, it is uncertain how much our economy will improve." He added, "Especially if China’s demand for raw materials increases and drives up prices, this could negatively affect our current account. The US monetary policy and the global economy resulting from it will also be important variables for our exports."

In response, Lee said, "According to forecasts from not only the Bank of Korea but also various economic institutions, the current account ratio to income and GDP is expected to be in the mid-1% range for this year." He added, "Since the 1990s, South Korea has recorded a current account deficit about seven times annually, with the nominal gross national income (GNI) ratio at -1.9%. Compared to that, there is no need to place excessive significance on the absolute level."

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