Current Account Surplus for 3 Consecutive Months... But Another 'Recession-Type' (Comprehensive)

Bank of Korea "Export Growth Rate Turns Positive from Q4"
Tourist Numbers Expected to Increase with China Group Tours Allowed
Rising International Oil Prices Pose Downside Risk... Increased Uncertainty in Goods Balance

In July of this year, the current account recorded a surplus of $3.58 billion, marking three consecutive months of surplus. However, since the surplus was generated due to imports decreasing more than exports, it is difficult to conclude that the economy has entered a recovery phase. The Bank of Korea expects concerns about recession to ease once exports turn positive from the fourth quarter onward, but with recent international oil prices rising sharply, uncertainties surrounding the current account remain significant.

Dongwon Lee, Head of the Financial Statistics Department at the Bank of Korea, is explaining the main features of the July balance of payments (provisional) on the morning of the 8th at the Bank of Korea in Jung-gu, Seoul. (Photo by Bank of Korea)

Current Account Surplus for Three Consecutive Months... But a 'Recession-Type' Surplus

According to the preliminary balance of payments statistics released by the Bank of Korea on the 8th, the current account recorded a surplus of $3.58 billion in July. After posting a deficit of $790 million in April, the account showed surpluses of $1.93 billion in May and $5.87 billion in June, marking three consecutive months of surplus. The surplus amount was larger than the same month last year ($1.7 billion) for the first time this year. However, the cumulative current account surplus from January to July was $6.01 billion, shrinking by about 77% compared to last year ($26.57 billion).

Looking specifically at the July current account, the goods balance recorded a surplus of $4.28 billion, continuing a surplus trend for four consecutive months since April.

This was due to imports decreasing more than exports, with both exports and imports still in decline. Exports amounted to $50.43 billion, down $8.79 billion (14.8%) compared to the same month last year. Passenger cars (up 15.7%) continued to perform well, but exports of petroleum products (-41.8%), semiconductors (-33.8%), and chemical products (-16.4%) declined for the 11th consecutive month.

On the other hand, imports fell sharply by $13.59 billion (-22.7%) to $46.15 billion. Both the amount and rate of decrease far exceeded those of exports. The Bank of Korea explained, "Imports of raw materials, capital goods, and consumer goods all decreased, marking five consecutive months of decline." Due to a drop in energy import prices, raw material imports decreased significantly by 35.7% compared to the same month last year. Among raw materials, the import value decline rates for gas, coal, crude oil, and petroleum products were 51.2%, 46.3%, 45.8%, and 40.9%, respectively.

The services balance recorded a deficit of $2.53 billion, marking 14 consecutive months of deficit. However, the deficit narrowed slightly compared to the previous month ($2.61 billion). The transportation balance showed a surplus of $90 million, increasing the surplus margin, but the travel balance recorded a deficit of $1.43 billion, widening the deficit and pulling down the services balance. The primary income balance recorded a surplus of $2.92 billion, mainly from dividend income. This marks the third consecutive month of surplus since turning positive in May.

Busan Port Sinsundae Pier
[Image source=Yonhap News]

Bank of Korea: Export Growth Rate Expected to Turn Positive from Q4

Although the 'recession-type surplus' trend continues mainly due to the goods balance, the Bank of Korea expects the export decline to ease from August. Lee Dong-won, head of the Bank of Korea's Financial Statistics Department, said, "While the export growth rate recovery stalled in July, the decline is expected to significantly reduce in August and September, and the export growth rate is expected to turn positive in the fourth quarter. If that happens, the term 'recession-type surplus' will lose much of its significance."

Additionally, the Chinese government's approval of group tours could lead to an increase in Chinese tourists visiting Korea, which may also benefit the current account. Lee said, "Monitoring shows that the number of Chinese tourists has definitely increased compared to July," adding, "The number of tourists is expected to gradually increase from mid-August and expand significantly around China's largest holiday, National Day."

Further Rise in International Oil Prices... Impact on Goods Balance

However, the recent upward trend in international oil prices is a factor increasing uncertainty in the current account. The Bank of Korea projected in its revised economic outlook on the 24th of last month that South Korea's current account would record a surplus of $27 billion this year, which requires a surplus of $24.6 billion in the second half alone. When the Bank of Korea made this projection, international oil prices were only $83 per barrel (Brent crude), but now they have risen to around $89-90 per barrel.

Since South Korea has a high dependence on external energy, rising international oil prices inevitably cause significant impact. Lee explained, "So far, the impact of international oil prices on the goods balance has been limited, but the recent sharp rise in oil prices could act as a factor reducing the goods balance if it continues from mid-September to the end of December." He also noted, "If crude oil prices rise and airfares increase, overseas travel could be restricted, which would also affect the travel balance."

Professor Kang In-soo of the Department of Economics at Sookmyung Women's University pointed out, "Due to production cuts by Saudi Arabia and Russia, oil prices have maintained an upward trend. While energy prices may not become extremely high, it is reasonable to expect that they will not fall from current levels." He added, "Rising energy prices are a factor that creates wrinkles in South Korea's economy. Since our industrial structure is not one that can significantly reduce energy consumption, the recession-type surplus is expected to continue for the time being."

Meanwhile, the financial account net assets (assets minus liabilities), which indicate capital inflows and outflows, increased by $3.72 billion in July.

Direct investment increased by $760 million. Domestic investors' overseas investments rose by $2.42 billion, and foreign investors' domestic investments increased by $1.65 billion. As a result, direct investment, which had turned to a decrease for the first time in five years and six months in the previous month, returned to an increasing trend after one month. Securities investment ($4.3 billion) showed the largest increase in 14 months since May last year, with domestic investors' overseas investments increasing by $6.9 billion and foreign investors' domestic investments rising by $2.6 billion.

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