Trade deficit feared to become long-lasting trend
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By Anna J. Park
By Anna J. Park
The Korean economy is witnessing growing concerns about its ever-increasing trade deficit, which has exceeded the $10-billion mark this year alone, as the country is expected to log a trade deficit in May for the third consecutive month. Analysts say the trend will continue for a while, with a twin deficit becoming more likely.
According to the Korea Customs Service last week, the trade deficit during the first three weeks of May stood at $4.82 billion. While exports totaled $38.61 billion during the period, which is a 24.1-percent increase year-on-year, the trade balance remained at a minus level, as imports increased 37.8 percent to $43.4 billion.
As the cumulative trade deficit so far this year nears $11 billion, market watchers say the Korean economy is highly likely to post an annual trade deficit by the end of this year. They also express worries that this year's trade deficit might reach a record high. The worst annual trade deficit ― of $20.6 billion ― was posted in 1996. Given that this year's trade deficit is already about $11 billion as of mid-May, it is possible that Korea could set a new record of the all-time high annual trade deficit this year.
Some market experts even speculate that Korea might log a twin deficit this year, which refers to simultaneous current account deficits as well as fiscal deficit. The majority of the current account deficits comes from trade balance deficits.
Given that the current trade deficit stemmed largely from soaring global raw material prices and energy prices, market watchers say the monthly trade deficit is likely to continue for a while.
“When analyzing terms of trade indices, as well as import and export prices, the current trade deficit is forecast to be maintained for a while,” Jeong Won-il, an economist at Yuanta Securities Korea, told The Korea Times, adding that an immediate improvement of the situation is not likely for the time being.
He also agreed to the market view that the country is at risk of posting a twin deficit this year.
“Regarding the government's fiscal deficit, it's true that the Korean government does not have much room in terms of fiscal capabilities,” he explained.
Considering much-expanded government spending over the past few years due in part to the response to the global pandemic, a gloomy outlook is a likely outcome. The Korean government has seen an annual fiscal deficit for three consecutive years from 2019 to 2021. If a twin deficit is realized this year, it will be the first time that Korea posts one in 25 years, since the Asian financial crisis in 1997.
Yet, Jeong added a line of optimism in the economic outlook, saying that the country's trade balance could improve during the rest of the year, as import prices are showing signs of being stabilized.
“Despite the unfavorable terms of trade, import prices have shown stabilizing moves lately. If the import prices continue stabilizing, the volume of trade deficit could be reduced somewhat, although the trade deficit itself could be maintained,” he said.