South Korea’s current account surplus is falling at a rapid pace, causing concern about a decline in income and consumption in the country.
South Korea’s exports have been posting minus growth for four months in a row from December last year, according to a report released by Hyundai Research Institute on April 14. Accordingly, the size of the nation’s current account surplus plunged from US$11 billion (12.51 trillion won) in October last year to US$3.60 billion (4.09 trillion won) in February this year.
The research institute said, “Considering the fact that the primary income account deficit grows in April due to a dividend payout to foreigners, there is a chance that the current account balance will post a deficit this month. We should be wary of instability expanding to the foreign exchange market.”
It also said the drop in the current account surplus means that the terms of trade is getting worse and there is a possibility that it can affect domestic income and consumption. A decrease in the index of income terms of trade implies that a country can import less goods in exchange for its exports. South Korea’s real gain from trade amounted to 12 trillion (US$10.55 billion) won to 19 trillion won (US$16.71 billion) per quarter in 2016 and 2017 when the terms of trade were favorable. However, the figure fell sharply to 4.80 trillion won (US$4.22 billion) in the fourth quarter of last year as the terms of trade have gotten worse since then.
Hyundai Research Institute believes that the market can be unstable when external conditions, such as the global economic slowdown and intensification of the trade dispute between the United States and China, get worse and the current account balance records a deficit at the same time. In addition, it said the reduction of the country’s current account surplus is a sign that the global economy is taking a downturn. As the volume of exports is dropping, the goods balance surplus is falling, leading to the decline in the current account surplus as well.
If the current account surplus continues to decrease, South Korea’s ability to pay foreign bills will also get worse. This is because the reduction of the current account surplus will increase Korea’s debt to foreign countries, while the overseas investment will be limited.