South Korea seems set to record a current account deficit in April for the first time since May 2012 in yet another warning sign about the sluggish performance of Asia’s fourth-largest economy.
With the Bank of Korea scheduled to announce official data this week, government officials have indicated that the country’s current account balance will tip into negative territory after having been in the black for 83 straight months through March.
A statement released Friday by the Ministry of Economy and Finance said there was a possibility that the country would suffer a “slight current account deficit temporarily” in April due to the payment of dividends to offshore investors.
But the deficit is not likely to be temporary. Dividend payments to foreign investors, which have been made in April every year, can hardly be viewed as a one-off factor behind the first monthly current account deficit in seven years.
With its exports continuing to decline, Korea’s current account deficit might become a structural problem down the road.
Outbound shipments of goods shrank for the sixth consecutive month in May to $45.9 billion, down 9.7 percent from a year earlier, according to data released Sunday by the Ministry of Trade, Industry and Energy.
Its trade surplus narrowed from $5.13 billion in March to $4 billion in April and $2.27 billion in May.
The downward trend is expected to continue in the months to come as the trade tensions between the US and China -- Korea’s top two trading partners -- are likely to escalate, reducing global demand for its key export items such as semiconductors.
The current account represents external transactions by a country, including trade in goods and services and the net income such as interest and dividend payments. A deficit in the current account means more money has flown out of a country for a certain period of time than it has gained abroad.
A current account deficit could have a more negative impact on a relatively small open economy like Korea.
A decrease in foreign currency reserves might lead to a downgrading of the country’s credit standing, which would increase borrowing costs and depreciate the won. A weaker local currency could prompt the outflow of foreign capital, precipitating a shortage of foreign currency reserves.
So far this year, the Korean currency has lost its value against the greenback by 7 percent to hover just below 1,200 won per dollar. The won is likely to weaken further as Korea’s exports are expected to continue to decline amid the prolonged trade friction between the US and China.
The announcement of the first monthly current account deficit in seven years could exacerbate foreign investor sentiment.
By signaling the possibility of a current account deficit in advance, the government seems to be attempting to cushion its negative impact on the market.
What is worrisome is that the release of negative figures on the current account coincides with mounting concerns over the weakening fundamentals of the Korean economy.
The economy contracted 0.3 percent on-quarter in the first three months of the year, marking the worst performance in a decade. Almost all of the country’s listed firms suffered a sharp drop in profits during the same period.
Government data showed output and investments increased for the second consecutive month in April. But the indicators might turn downward in the months to come, as domestic consumption as well as exports are decreasing.
The central bank needs to consider cutting its key interest rate, which has been held at 1.75 percent since November, to help boost the economy. Last month, the BOK trimmed its growth outlook for the year to 2.5 percent from 2.6 percent, expecting that the economy would gather pace during the second half of the year. As many economists note, the bank’s economic assessment is likely to prove too optimistic.
What is immediately needed to prevent the current account deficit from being extended is to strengthen the competitiveness of manufacturing exporters. It is necessary to step up efforts to nurture new growth engines, not just wait for global demand for chips to rebound.
In a broader context, regulatory and labor reforms should be accelerated to help boost corporate investments, particularly in the service sector.