[Why&Next] Despite Trump Tariff Pressure... Why This Year's Current Account Surplus Is Projected to Hit an All-Time High

Robust Semiconductor Cycle Driven by AI Investments: "Boom Expected Through Next Year"
Decrease in Imports from Falling Oil Prices Further Expands Surplus
Structural Growth in Primary Income Balance Also a Key Factor
"Institutions and Individuals Earning Interest and Dividends Abroad"

'110 billion dollars (approximately 152.8 trillion won).' This is the projected current account surplus for this year, according to the Bank of Korea. If this forecast is realized, it would surpass the all-time high of 105.12 billion dollars recorded in 2015. Major global investment banks have also described Korea's recent current account performance as 'incredibly strong,' and expect this positive trend to continue through the end of the year. This outlook comes despite persistent concerns that Korea's exports, a major pillar of the economy, would deteriorate throughout the year due to heightened uncertainty over U.S. tariffs. So, how is such an optimistic forecast possible?

Robust Semiconductor Cycle: "Boom Expected to Continue into Next Year"

According to the Bank of Korea's Economic Statistics System (ECOS) on September 8, the provisional current account surplus for January to July this year stands at 60.15 billion dollars. This is 10.94 billion dollars (22.2%) higher than the 49.21 billion dollars recorded during the same period last year. The strong performance of the goods balance (the difference between exports and imports of goods), which is the largest component of the current account, was particularly notable. The Bank of Korea recently raised its current account surplus forecast for this year to 110 billion dollars, largely due to expectations of a 30.7 billion dollar year-on-year increase in the goods balance surplus.

Despite concerns over U.S. tariffs, semiconductors have been the main driver supporting Korea's exports this year. The boom in the semiconductor industry, fueled by growing demand for artificial intelligence (AI) infrastructure, has led to a surge in semiconductor exports, a key sector for Korea. From January to July, semiconductor exports based on customs clearance totaled 89.01 billion dollars, up 14% from the same period last year. In July alone, semiconductor exports reached 14.91 billion dollars, a 30.6% increase compared to the same month last year, driven by AI investment demand, the imposition of U.S. tariffs, and preemptive purchases ahead of the discontinuation of Double Data Rate (DDR) 4.

The Bank of Korea believes that this expansion phase in semiconductor exports is likely to be prolonged, similar to the IT revolution and mass adoption in the early 2000s. As big tech companies have ramped up investments in AI servers since the advent of ChatGPT, the AI infrastructure base is expanding from big tech to general companies, and from companies to entire countries. Song Jaechang, Director of the Financial Statistics Division at the Bank of Korea's Economic Statistics Department, stated, "For the time being, the key factor in the current account will be the sustained demand for AI infrastructure, which is expected to continue into next year."

Global investment banks have also identified Korea's strong semiconductor exports as a major factor behind the current account surplus. Nomura Securities predicted, "Supported by solid global AI demand and efforts by companies to diversify export destinations, Korea's exports are likely to maintain robust recovery momentum for the time being." According to the International Financial Center, major global investment banks have raised their forecasts for Korea's current account surplus this year to 5.1% of gross domestic product (GDP).

Decrease in Imports Due to Falling International Oil Prices... Further Boosts Current Account Surplus

The decline in energy prices, which has reduced imports, is also contributing to the expansion of the current account surplus. In its economic outlook last month, the Bank of Korea projected the price of Brent crude oil to average 68 dollars per barrel this year and 63 dollars next year, down from 80 dollars last year. ING stated, "As global commodity prices remain stable, Korea's goods balance surplus will widen," but also noted, "However, the expansion will be limited by a simultaneous slowdown in exports of petroleum products and petrochemicals."

However, the impact of U.S. tariffs is expected to gradually increase. In fact, the effect of U.S. tariffs has been intensifying in the second half of the year. The latest current account data for July showed negative effects on exports to the U.S., particularly for items subject to tariffs such as automobiles, auto parts, and steel. Exports of automobiles to the U.S. are expected to decline as future tariff hikes are passed on to sales prices, leading to weaker demand. Similarly, steel exports to the U.S. have already been negatively affected by reduced demand and falling prices due to the global slowdown in construction and manufacturing, and the expansion of tariffed items is expected to make the impact even more pronounced.

Structurally Expanding Primary Income Balance: "Institutions and Individual Investors Earning Interest and Dividends Abroad"

The structurally expanding primary income balance is also contributing to the increase in the current account surplus. The growth in overseas direct investment by Korean companies, along with increased overseas stock and bond investments by institutions and individual investors, has led to a rise in interest and dividend income from abroad, thereby expanding the primary income balance. The primary income balance reflects the difference in compensation of employees and investment income between residents and non-residents.

The primary income balance has seen a significant upward trend since the 2020s, rising from 13.49 billion dollars in 2020 to 19.44 billion dollars in 2021, 20.35 billion dollars in 2022, 26.25 billion dollars in 2023, and 26.62 billion dollars last year. As of July this year, it had already reached 17.54 billion dollars. This is the result of years of steady increases in overseas direct investment by companies through foreign subsidiaries, as well as a sharp rise in securities investment by institutions and individual investors since the COVID-19 pandemic. In the second quarter of this year, Korea's external financial assets posted a record increase of 165.1 billion dollars, driven by expanded overseas direct and securities investments and the strong performance of the U.S. stock market.

Even taking into account fluctuations in goods trade performance, the share of the primary income balance in the current account has risen from 17.8% in 2020 to 26.9% last year. Last year, despite the goods balance surplus pushing the current account to 99.04 billion dollars, the second highest on record, the primary income balance accounted for nearly 30%. The market expects that, although there may be differences among investment entities such as the National Pension Service, institutions, and individuals, the conditions will likely allow for large-scale overseas investment by domestic investors for the foreseeable future.