Record trade deficit prompts concerns over capital flight

Korea suffers record shortfall in January amid supply chain crisis

By Yi Whan-woo

Korea suffered its largest-ever monthly trade deficit in January due to a spike in prices of oil and raw materials caused by the global supply chain crisis, spawning fears over a further depreciation of the Korean won against the U.S. dollar and subsequent outflow of foreign capital.

The trade shortfall stood at $4.89 billion, up sharply from $450 million in December when the country's trade balance shifted to the red after staying in the black for 19 consecutive months.

This is the first two-month trade deficit since the global financial crisis in 2008. The trade deficit in January exceeds the previous record of $4.04 billion posted in January 2008. It was the largest monthly deficit the government has recorded in the time it has been compiling related data, which started in 1966.

Ukrainian service members of the Air Assault Forces attend military drills in the country's Lviv region, in this handout picture released on Feb. 1. The Ukraine-Russia crisis is feared to be adding to the energy price hike that is blamed for Korea's trade deficit in January. Reuters-Yonhap

The price hike in crude oil, gas and oil ― a key factor in the steep increase of imports ― is likely to persist for the time being due to the escalating Ukraine-Russia crisis and the prolonged disruption in global supply chains.

Imports of the three energy sources cost $15.95 billion in January, more than double from a year ago, and accordingly, the total amount of imports shot up 35.5 percent to $60.21 billion over the same period, according to the data released Feb. 1 by the Ministry of Trade, Industry and Energy.

Exports in January expanded 15.2 percent from a year earlier to $55.32 billion, rising for the 15th consecutive month. The increase rate, however, was the slowest since February 2021.

A container is being loaded into a cargo plane in this photo taken in 2018. Korea Times file

Financial sources say a forecasted growth slowdown of the United States and China, which account for 40 percent of Korea's exports, as well as the won's depreciation, are further dimming the outlook on the trade balance.

Major international financial institutions have revised down their 2022 economic outlooks for the world's two largest economies, including the International Monetary Fund (IMF) which slashed the U.S.' growth from 5.2 percent to 4 percent and that of China from 5.6 percent to 4.4 percent.

All these aforementioned trade risks indicate that the countries' trade deficit will continue for a while, which could also turn the current account balance into the red as witnessed in the 2008 global financial crisis, sources said. The current account balance currently remains in the black.

A source pointed out the current account deficit just before the 2008 crisis amounted to $7.21 billion. A country's current account records the value of trade of both goods and services as well as international transfers of capital.

“And it was a reason behind foreign investors finding the Korean financial market no longer lucrative and pulling out their money back then,” the source said.

Other sources noted the possible current account deficit can result in a twin deficit, which refers to a nation having both a current account deficit and a budget deficit.

Under the government's fiscal policy of supporting households and small businesses hit by strict social distancing measures, the national debt has accumulated to 22.4 trillion won as of November 2021.

The country is expected to post a fiscal deficit of 68.1 trillion won ($56.3 billion) this year, and the estimated amount can surpass the previous record of 71.2 trillion won in pandemic-hit 2020 if the government expands relief funds to overcome the pandemic.

Meanwhile, overseas investors went on a selling spree for seven consecutive trading days until Jan 28. They sold shares worth more than 4.4 trillion won on the benchmark KOSPI, causing it to dip below the 2,600-point mark for the first time in 14 months, Jan. 28.