Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Specter of twin deficits looms large over Korea's credit ratings
A meeting hosted by the Ministry of Trade, Industry and Energy takes place to discuss corresponding export measures over the Ukraine-Russia crisis, at the Korea Trade Insurance Corp. in Seoul, Tuesday. Yonhap
By Yi Whan-woo
By Yi Whan-woo
Concern is growing over the economy falling into the trap of twin deficits, as the country's trade balance is on the verge of remaining in the red for the third consecutive month while its budget deficit tops 100 trillion won ($83.74 billion).
The looming risk of twin deficits, which refers to deficits in both budget balance and current account balance ― with the trade balance being its main component ― is fueling concerns it will also negatively affect Korea's credit ratings to be updated by S&P and Moody's as early as April.
Any possible downgrade in sovereign ratings, according to analysts, Tuesday, will add to multiple stumbling blocks to be faced by the next president in revitalizing the pandemic-stricken economy after the March 9 presidential election.
Korea's trade deficit during the first 20 days of February is estimated at $1.67 billion, according to the Korea Customs Service (KCS), Tuesday.
The deficit is attributed to soaring oil and other energy prices. If the trend continues until the end of this month, the losing streak of the trade balance will be extended for the third month straight.
In a separate finding released by the Ministry of Trade, Industry and Energy, Feb. 1, the trade shortfall went up from $452 million last December to $4.89 billion in January.
It was the largest monthly deficit the government has recorded since it started compiling related data in 1966.
“As far as I remember correctly, S&P cited Korea's trade surplus and stabilized government budget balance when it upgraded the country's credit rating in 2016,” Lee Sang-ho, head of the Korea Economic Research Institute's (KERI) economic policy team, told The Korea Times. “But it could change its mind this time considering Korea's budget balance and trade balance are getting far worse.”
One of the three global ratings agencies, S&P, has kept Korea's long-term sovereign credit rating since August 2016 at “AA,” the third-highest level on the company's table. It is anticipated to update the rating in April.
Moody's currently maintains an “Aa2” rating on Korea with a stable outlook. The new rating is expected to be announced in the next two or three months, based on the outcome of the agency's ongoing annual consultation with the Ministry of Economy and Finance, the Bank of Korea and other relevant government groups from Feb. 21 to 28.
Fitch affirmed Korea at “AA-,” the fourth-highest level in its system, last month.
Lee warned that the ratings from any of the three agencies can be downgraded, pointing to the sluggish pace of export growth amid concerns over the depreciation of the Korean won against the U.S. dollar and subsequent outflow of foreign capital.
The Ukraine-Russia conflict can deal a blow to the energy market, thereby aggravating Korea's slowdown in export growth in the long term.
“And you can imagine the heavy burden the next president will face,” Lee said.
Another analyst speculated there could be an outflow of foreign capital from Korean bond investments, possibly a record high of 214 trillion won, if S&P and Moody's downgrade Korea's ratings and present a negative outlook on its economy.