hankyoreh

South Korea recorded a deficit of over US$4.4 billion during the first quarter of 2023 in its current accounts balance, an indicator showing its economic performance in overseas transactions.

This figure was heavily shaped by a historically large deficit in the goods balance, which shows the difference between export and import dollar value. This suggests that barring a recovery in exports from the second quarter onward, South Korea is unlikely to achieve the annual current account surplus of US$20 billion or more that has been predicted by the government and Bank of Korea (BOK).

A provisional report on the March 2023 international trade balance published by the BOK on Tuesday showed a current account surplus of US$270 million for that month.

This means that the balance narrowly escaped recording a third straight month in the red after deficits in January and February of this year.

Deficits in the goods and service balances were down slightly from the previous month, and the current account balance was also shored up by a surplus of US$3.65 billion in the primary income account balance — over three times its level in March 2022, thanks primarily to dividend inflows from South Korean companies’ overseas subsidiaries.

However, Korea’s first-quarter current account balance went from a surplus of US$14.88 billion last year to a deficit of US$4.46 billion this year — the largest first-quarter deficit in 17 years since the US$4.95 billion deficit recorded in 2006.

The rapid deterioration in the balance of goods is striking, with a deficit of US$9.74 billion in the first quarter amid a dramatic fall in exports. This is the largest quarterly deficit on record since the country’s central bank reformed statistics on international balance of payments in 1980.

Korea’s balance of services, which hasn’t registered a first-quarter surplus since 2001, has ballooned 12.6 times in the space of a year from US$570 million in the red last year to a deficit of US$7.2 billion this year.

The primary income account, which measures inflows and outflows of income from wages, dividends and interest, has put up a good defense with the highest-ever surplus of US$13.31 billion. Dividend income accounted for 85% of this figure, with US$11.33 billion in total.

“The application of corporate tax benefits to dividend income flowing into Korea from overseas subsidiaries since January has led to a substantial primary income account surplus,” said Shin Seung-cheol, director of the Bank of Korea’s economic statistics department.

As the primary income account is helping to bolster the current account, the April figures will be crucial. The payment of dividends to foreign investors in Korea is clustered in April, leading to a greater likelihood of a deficit in the primary income account. If this occurs, Korea’s current account could once again fall flat in April.

On this point, the Bank of Korea expects the increased dividend income returning to Korea from overseas subsidiaries to offset the increased outflow of dividends in April, leading to a slightly reduced primary income account deficit.

The current account deficit for the quarter has stymied Korea’s hopes of reaching an annual surplus of US$20 billion. Based on the premise of improvement in the balance of goods due to exports picking up in the second half of the year, the government and Bank of Korea are predicting figures of US$21 billion and US$26 billion, respectively.

However, considering the performance to the end of the first quarter and the trends and forecasts for inflows and outflows after April, reaching the US$20 billion mark may prove difficult. If this year’s surplus is below US$20 billion, it would be the first time in 12 years after the US$16.64 billion recorded in 2011.

Some domestic agencies are making downward adjustments to their current account forecasts.

In an amended economic forecast released on Tuesday, the Korea Institute of Finance predicted this year’s current account balance would be US$18.3 billion. This represents a significant drop from the US$32.6 billion forecast in December. The Korea Development Institute also adjusted its surplus forecast from US$27.5 billion to US$16 billion earlier this month.

“If the level of imports remains high in a situation where exports are sluggish, it will be impossible to avoid a deterioration in the current account and accumulated macroeconomic vulnerabilities,” said Korea Institute of Finance researcher Song Min-kee. “We have to drive exports while inducing adjustments in the demand for imported goods such as raw materials.”

By Park Soon-bin, senior staff writer

Please direct questions or comments to [english@hani.co.kr]