May Current Account Turns Surplus... Past the Low Point but "Risks Remain High" (Comprehensive)

Triple Improvement in Goods, Primary Income, and Services Balances
Semiconductor Recovery Delayed and Increased Economic Uncertainty in China

Thanks to the triple improvement in the goods balance, primary income balance, and services balance, South Korea's current account turned to a surplus in May after a month of deficit. Although semiconductor exports continue to decline, the goods balance recorded a surplus for two consecutive months due to strong passenger car exports, and the primary income balance also returned to surplus as dividend payments to foreigners decreased. However, concerns have emerged that the pace of economic recovery in the second half of the year may be slower than expected due to the delayed recovery of the semiconductor industry, a key export sector, and the potential expansion of the travel balance deficit caused by an increase in travelers in July and August.

According to the preliminary balance of payments statistics released by the Bank of Korea on the 7th, South Korea's current account recorded a surplus of $1.93 billion in May. This marks a turnaround to surplus after a deficit of $790 million in the previous month.

South Korea's current account posted deficits for two consecutive months in January and February this year for the first time in 11 years, then barely recorded a surplus of $160 million in March, but immediately returned to deficit in April. In April, the primary income balance turned to deficit due to concentrated dividend payments to foreigners, which pulled down the overall current account level.

Although the current account returned to surplus this month, the cumulative current account deficit from the beginning of this year through May still stands at $3.44 billion. Compared to the same period last year, this is a decrease of $22.25 billion.

Looking at the current account by item in May, the goods balance recorded a surplus of $1.82 billion, continuing the surplus trend for two consecutive months following April's $580 million surplus. However, this was due to imports decreasing more than exports, and the export decline trend continues.

◆Past the bottom, but exports decline for 9 consecutive months= Exports amounted to $52.75 billion, with passenger cars maintaining strong performance, but exports decreased by $9.06 billion year-on-year, mainly in semiconductors, petroleum products, and chemical products. Since exports declined in September last year for the first time in 23 months, the decline has continued for nine consecutive months. Based on customs clearance, passenger car exports increased significantly by 52.9%, but semiconductors (-35.6%), petroleum products (-33.0%), steel products (-8.3%), and chemical products (-20.8%) remained sluggish. By region, exports to Southeast Asia (-26.9%), China (-21.1%), Japan (-8.4%), and the EU (-3.0%) contracted.

Imports totaled $50.93 billion, down $7.93 billion year-on-year. Imports of raw materials (-20.3%), capital goods (-5.7%), and consumer goods (-7.8%) all decreased. Among raw materials, import declines for coal, petroleum products, gas, and crude oil were 35.2%, 25.5%, 20.3%, and 16.2%, respectively.

The services balance recorded a deficit of $910 million, marking a deficit for one year since May last year. The transportation balance turned to a deficit of $350 million, and the travel balance deficit widened to $820 million compared to April's (-$500 million), due to an increase in overseas travelers following the easing of COVID-19 related quarantine measures.

The primary income balance, which recorded a deficit in April, returned to a surplus of $1.42 billion. This was due to a sharp increase in dividend income from overseas local subsidiaries, with dividend income surging from a deficit of $550 million to a surplus of $900 million in just one month.

The financial account, which indicates capital inflows and outflows, recorded a net increase of $2.65 billion. Direct investment saw an increase of $3.17 billion in outbound investment by domestic investors and a $1.07 billion increase in inbound investment by foreigners, turning to an increase again after one month.

Securities investment increased by $1.54 billion in outbound investment by domestic investors and $13.5 billion in inbound investment by foreigners. Foreign investment in South Korea reached the highest level since statistics began in January 1980. Demand and supply for domestic bonds both increased, leading to a significant rise in foreign investment in domestic bonds.

[Image source=Yonhap News]

◆Current account improvement in June... Annual forecast achievable= The Bank of Korea expects the improvement trend in South Korea's current account to continue in June. Lee Dong-won, head of the Bank of Korea's Financial Statistics Department, said, "South Korea's current account has emerged from the bottom and entered a recovery phase, supported by improvements in the goods and services balances, which were very weak earlier this year," adding, "The improvement in the goods balance is expected to accelerate in the second half of the year compared to the first half." The Bank of Korea forecast an annual current account surplus of $24 billion this year, and explained that this figure is currently fully achievable. Lee said, "The trade balance turned to surplus in June for the first time in 16 months, and the primary income balance is expected to improve compared to May, so the current account surplus in June will exceed that of May," and "We expect the overall surplus trend to be maintained in the second half of the year, with surpluses in both the third and fourth quarters on a quarterly basis."

The government places weight on a 'low in the first half, high in the second half' outlook as the current account turned to surplus in May and the recovery phase began in the second half, but experts evaluate that it is too early to be optimistic given risks such as global economic sluggishness and China's economic recovery. Kang Sam-mo, professor of economics at Dongguk University, pointed out, "Inflation has been somewhat controlled and oil prices have stabilized, but it is uncertain whether economic growth or exports will recover in the second half of the year," adding, "At the beginning of the year, it was expected that exports to China would recover in the first half and the Ukraine war would stabilize, but exports to China and Korea-China relations are still poor, and the Ukraine war shows no signs of stabilizing." Professor Kang said, "The growth outlook for the global and Korean economies does not look much better than at the beginning of the year," and "The second half may be better than the first half, but the expectation that economic growth will fully recover as forecast at the beginning of the year has weakened."

Yu Hye-mi, professor of economics and finance at Hanyang University, said, "Exports to China have fallen far short of expectations, slowing the pace of export recovery, and the semiconductor industry's recovery has been delayed from the initially expected third quarter to the fourth quarter, making it difficult for the current account to improve in the short term," adding, "China is responding with monetary policy because it is difficult to use fiscal policy to stimulate the economy, but it is unlikely that China's economy will fully revive." Joo Won, head of economic research at Hyundai Research Institute, said, "To reduce the deficit in the services balance, the travel balance must improve, but due to the weak yen, competition with Japan is difficult, and attracting tourists is expected to be challenging," adding, "With the arrival of the peak travel season, the travel balance deficit may further expand."

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