Koreans' offshore investments undercut won strength despite record current account surplus

Vehicles for export are lined up at Pyeongtaek Port in Gyeonggi Province, Nov. 2. Yonhap

The Korean won slid to a seven-month low even as the export-heavy economy posted a record current account surplus, weighed down by steady capital outflows as Korean investors’ offshore equity purchases outpaced foreign inflows, analysts said Sunday.

The sharp decline is explained by foreign investors’ profit-taking from the KOSPI rally. Their continued buying propped up the won until October, but a selloff of over 7 trillion won ($4.8 billion) in the first week of this month led to a pronounced weakness in the Korean currency.

Many analysts say the traditional correlation between a current account surplus and currency strength no longer holds for Korea, as the U.S. dollars earned through robust exports are being redirected for offshore investments by retail equity investors, pension funds and corporate entities.

The Korean currency may gain slightly in the second half of the year, influenced by the tempered strength of the U.S. currency, observers say. However, the currency is likely to remain weak overall through the end of the year, with its value not improving better than 1,400 won per dollar.

According to financial market data, the won ended last week’s trading at 1,456.9 won per dollar, the weakest weekly close since April.

The currency weakness came despite Korea registering a current account surplus for 29 consecutive months in September. The monthly surplus of $13.47 billion was the second-largest on record, driven by robust semiconductor and automobile exports.

Usually, a current account surplus would bolster the won because it means Korea exports more goods, services and capital income than it imports. Simply put, Korea is earning more dollars than it is spending.

But this year, nearly all the dollars earned from Korea’s exports have been redirected abroad through retail and institutional offshore investments.

Korea’s current account surplus reached $82.8 billion in the first nine months of this year, while the country’s combined direct and equity offshore investments totaled $80.9 billion, essentially neutralizing the inflow impact.

Korea’s net foreign assets amounted to 55 percent of GDP as of June, close to an all-time high of 58.8 percent late last year.

The increase in the figure helps with Korea’s external soundness, but undermines domestic investment base due to capital outflows, accelerating the won’s depreciation.

"The long-standing rule where a current account surplus leads to a stronger won simply doesn’t apply anymore," a KB Kookmin Bank report said.

The imbalance has left the won among the worst-performing major currencies in recent weeks.

The won lost nearly 2 percent against the dollar last week, despite the U.S. dollar index remaining almost flat.

The index is widely used to measure the value of the U.S. dollar relative to six major foreign currencies including the euro, Japanese yen, British pound and Canadian dollar.

Brokerages say the won trading at the 1,400 won level has become the new normal.

“The won will remain weak throughout this year. Even if dollar strength moderates, Korea’s structural foreign currency imbalance, explained by sustained strong offshore investments, will limit any strong appreciation of the won,” a Woori Bank report said.

“The won falling further to 1,500 won against the U.S. dollar cannot be ruled out, if U.S. policy uncertainties or trade tensions intensify again.”