First Quarter Current Account Deficit in 11 Years... Largest Deficit Since 2006 (Comprehensive)

Main Export Item Semiconductor Market Hits Bottom
No Effect Yet from China Reopening
Slight Surplus in March from Dividend Income
April Foreign Dividend Concentration Season
Possibility of Returning to Deficit Again

In March this year, the current account balance narrowly returned to a surplus after three months, recording a surplus of $270 million thanks to dividend income. However, the surplus significantly decreased due to the downturn in the semiconductor industry caused by the global economic slowdown and sluggishness in China, the largest trading partner. The current account also recorded a quarterly deficit in the first quarter for the first time in 11 years since 2012.

According to the provisional international balance of payments for March released by the Bank of Korea on the 10th, the domestic current account recorded a surplus of $270 million, a decrease of $6.5 billion compared to a surplus of $6.77 billion a year earlier.

The current account turned to a deficit again in January this year with a deficit of $4.21 billion, the largest since statistics began in 1980, and recorded a deficit for two consecutive months in February. In particular, the total current account for the first quarter (January to March) showed a deficit of $4.46 billion, a sharp drop of $19.34 billion compared to $14.88 billion a year earlier. This is the largest quarterly deficit since the first quarter of 2006, which recorded a deficit of $4.95 billion. The previous quarterly low was in the third quarter of 2008 during the global financial crisis (-$4.64 billion).

Goods Balance Deficit for Six Consecutive Months...Exports Decline for Seven Consecutive Months

By detailed items, the goods balance showed a deficit for six consecutive months. It turned to a deficit with a decrease of $6.69 billion compared to the same month last year. Exports amounted to $56.42 billion, down $8.16 billion (12.6%) from the same month last year. Exports have declined for seven consecutive months due to the global economic slowdown affecting semiconductors, chemical products, and petroleum products.

In particular, semiconductors (customs basis -33.8%), chemical products (-17.3%), petroleum products (-16.6%), and steel products (-10.8%) showed weakness. By region, exports to China (-33.4%), Southeast Asia (-23.5%), and Japan (-12.2%) contracted. Imports amounted to $57.52 billion, down $1.47 billion (2.5%) from the same month last year.

The services balance recorded a deficit of $1.9 billion. The services balance turned to a deficit with a decrease of $2.08 billion compared to the same month last year. The primary income balance recorded a surplus of $3.65 billion, an increase of $2.61 billion in surplus compared to the same month last year. Among the primary income balance, the dividend income balance surplus ($3.15 billion) increased by $2.86 billion over one year.

Shin Seung-chul, director of the Economic Statistics Bureau at the Bank of Korea, said, "The Bank of Korea's research department expected a current account deficit of $4.4 billion in the first half, and the first quarter current account deficit of $4.46 billion is almost the same," adding, "The current account is expected to reach a balanced level in April, and the current account will show a gradual improvement for the time being." However, Director Shin explained, "There are differences from the February forecast due to the global IT downturn and the China reopening effect, so there is a possibility of downward revision of the annual forecast in the revised economic outlook on the 25th."

The first quarterly current account deficit since 2012 is due to the semiconductor market, Korea's main export product, hitting bottom and the China reopening effect being delayed more than expected. The deficit in the current account also recorded the largest since the $4.95 billion deficit in 2006, indicating continued sluggishness in the Korean economy. However, the primary income balance has maintained a surplus this year, playing a role in offsetting the goods balance deficit.

According to the Bank of Korea, despite the goods balance deficit for six consecutive months in March, the current account was able to escape the deficit trap of January and February thanks to the surplus in the primary income balance. The primary income balance surplus ($3.65 billion) increased by $2.61 billion compared to March last year ($1.04 billion). In particular, the dividend income balance surplus ($3.15 billion) among the primary income balance increased by $2.86 billion compared to a year ago, having the greatest impact. This means that the increase in dividend income received by domestic companies from overseas local subsidiaries has expanded the surplus in the primary income balance, significantly offsetting the goods balance deficit.

Dividend Income Surplus Expected to Continue...Effect of Government Corporate Tax System Reform

The Bank of Korea expects this trend to continue this year. The impact of the government's corporate tax system reform will last throughout the year, and there is still demand for facility investment funds from major domestic companies, making the outlook for the primary income balance bright. There is demand for facility investment from major domestic companies, and cases are occurring where overseas profits earned by overseas local subsidiaries are received in the form of dividends for such investments, increasing the surplus.

Director Shin said, "It is difficult to predict how much dividend income will be received annually from overseas local subsidiaries as it depends on the company's financial condition, strategy, and exchange rate levels," but added, "However, it is expected to be significantly higher than in previous years, and the current year's performance shows the maximum, so there is a possibility of additional income during the remaining period."

However, although the current account in March narrowly avoided a deficit for three consecutive months thanks to dividends, experts agree that the situation is not optimistic. Exports, centered on Korea's main products such as semiconductors and chemical products, have decreased, continuing the goods balance deficit for six consecutive months. In particular, April is a period when foreign dividends from domestic companies are concentrated, raising concerns that the current account deficit may increase again.

Joo Won, head of the Economic Research Department at Hyundai Research Institute, said, "Since the trade balance deficit in April is expected to be smaller than in March, the goods balance deficit is also likely to decrease slightly," adding, "With recent stabilization of raw material prices, the current account is expected to maintain a surplus trend." However, he added, "The current deficit reduction is due to a decrease in imports rather than an increase in exports, and the export situation does not seem likely to improve significantly," emphasizing, "Ultimately, the recovery of the Chinese economy, which is key to our exports, will be important."

Experts Warn "No Optimism"...Semiconductor Recovery and China Reopening Effects Are Key

Going forward, the current account is expected to be greatly influenced by the recovery of the semiconductor market and the full-scale effect of China's reopening. The sharp increase in outbound travelers during the summer season, which negatively affects the services balance, is also a variable. The services balance showed a surplus for three months from February to April last year but has been in deficit for 11 consecutive months since May. Kim Jeong-sik, emeritus professor of economics at Yonsei University, said, "In summer, energy demand decreases, reducing imports and positively affecting the goods balance, but the rapid increase in overseas travel demand negatively impacts the current account," adding, "Although the current account recorded a slight surplus in March after three months, the overall deficit in the first half is significant, so optimism is unwarranted."

Ha Jun-kyung, professor of economics at Hanyang University, said, "Our economic structure ultimately depends on exports and imports, but the delay in semiconductor market recovery and China's continuous reduction of trade dependence on Korea are increasing uncertainty," adding, "The risk of raw material price fluctuations remains due to the Russia-Ukraine war situation, making the overall situation difficult."

Kang Sung-jin, professor of economics at Korea University, said, "Dividend income occurs in specific months, so the goods balance is ultimately important, but since China's economic recovery is slow and the semiconductor market and global economy are weak, the trade balance deficit is likely to continue for the time being," predicting, "It will not improve significantly compared to last year." Professor Kang added, "Although Korea-Japan relations have recently improved, Korea has not overcome the deficit against Japan, so it is hard to expect a sudden increase in exports to Japan," and said, "Tourism may improve the travel balance between Korea and Japan due to increased tourists, but it is difficult for the trade part to improve."

Regarding the April outlook, Director Shin explained, "Even if the current account deteriorates due to foreign dividend payments in April, the dividend income from overseas local subsidiaries of domestic companies and the recent improvement trends in goods and services balances mean that the April current account will not deviate significantly from a balanced level."

[Image source=Yonhap News]

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