First and foremost, we welcome Korea’s highest-ever monthly current account surplus for October, which hit $4.91 billion. Korea thus has ended a three-month long current account deficit that lasted from July to September. The Bank of Korea expects the country will post around $1 billion in current account surplus in November as well. A surplus in the current account means Korea has had bigger dollar inflow than dollar outflow. Considering that the recent forex rate surge stemmed from a severe dollar shortage, a surplus in the currency account will effectively lessen the spiking exchange rate.
However, closer examination of what lay behind the record current account surplus reveals a shadow of a doubt. Korea was able to post a record surplus mainly due to a plunge in imports resulting from falling prices of international raw materials, including crude oil. The surplus was also buttressed by the reversal of the travel account deficit to a surplus for the first time in seven years due to declining overseas travels by Korean nationals. This in turn suggests that the current account surplus could reverse course again at anytime, depending on external factors.
The best measure Korea can seek to consolidate a surplus in its current account is to shore up exports. The Korean economy was able to overcome the Asian financial crisis through export 10 years ago. Unfortunately, however, the current situation is not favorable enough to allow Korea to elbow its way through the crisis by expanding export. Even if the country manages to sustain surpluses in the current account for November and December, it will almost certainly not post a current account surplus for the year in its entirety. Against this backdrop, if the trend of a current account surplus changes its course again, foreigners’ perspective on the Korean economy will turn more negative as well.
The situation is far from a favorable one, but the Korean economy has no way out other than the expansion of export. The government expects Korea will post $5.6 billion in trade deficit next year. However, it expects the country will sustain around $5 billion in current account surplus. Korea must redouble efforts to consolidate the trend of current account surpluses, irrespective of the variable of international oil prices, by reducing trade deficits through the development of niche and new markets. As such, the easing of financial crunches, including the normalization of trade financing, is urgently required.
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