Concerns over the current account deficit: The DONG-A ILBO

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The Bank of Korea warned of a current account deficit in August. Unlike the trade balance which only takes into account imports and exports of goods, the current account balance is a sum of imports and exports of goods and services. Soaring oil and commodity prices led to a trade balance deficit for five consecutive months, but the current account balance, which includes the value of exports and imports of goods and services as well as capital transfers , remained in surplus until recently; however, the country’s current account surplus is contracting sharply. Just a week ago, President Yoon Suk-yeol reassured the public by saying that this year’s current account surplus is expected to top $30 billion.

The current account surplus in July fell by 85% compared to the previous year, due to an unsustainable trade deficit that is difficult to balance by other sectors. South Korea recorded a trade deficit of $9.47 billion in August, the highest figure on record. There are no signs of recovery anytime soon as the global semiconductor industry faces a slowdown and growth in China, South Korea’s biggest trading partner, has slowed. Dividends and interest from foreign investments are declining due to the global stock market recession, and once overseas travel begins, the country’s travel balance will likely turn negative.

The current account balance is one of the main barometers of the strength of the national economy. A budget deficit and a current account deficit are together called the “twin deficits”, against which the country must protect itself. South Korea, with a national debt already over 100 billion won, could see a downgrade in its sovereign credit rating. With rising US interest rates combined with the weak Korean economy, the depreciation of the won against the dollar, which is much larger than the Japanese yen, Chinese yuan and European euro, is attributable to the high demand for dollars.

What is more worrying is a fundamental shift in the way Korea’s economy has developed, including its relationship with China, which accounted for a quarter of the country’s trade and 80% of the country’s trade surplus. country. With the exception of the semiconductor sector, China has narrowed its gap with South Korea in smartphone and display manufacturing. On the other hand, Korea inevitably depends on imports from China for the raw materials needed to manufacture batteries for electric vehicles.

Contrary to the government’s hopes on falling oil and other commodity prices, the war in Ukraine is far from over, and stabilizing oil prices would not immediately bring the deficit back to its original state. Before it is too late to turn back the clock, the government must increase its exports of high value-added products, pursue the sophistication of the service industry and diversify its trading partners. Without a fundamental revision of the growth strategy of the Korean economy, a crisis could arise at any time.

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