Do not downplay dangers of twin deficits
South Korea's current account, a broad measure of its global trade in goods and services as well as net earnings on cross-border investments, returned to a deficit in August for the first time in four months. This is raising fears of an economic crisis as the country is likely to continue to suffer a simultaneous phenomenon of twin deficits ― fiscal and current account deficits.
According to preliminary data released Friday by the Bank of Korea (BOK), the country suffered a current account deficit of $3.05 billion in August, compared to a surplus of $790 million in July. Korea enjoyed a current account surplus for 23 months in a row before it posed a deficit of $79.3 million in April.
We have to pay more attention to the issue, because the shortfall came as the country saw its exports growing at a slower place while its imports surged amid high global prices of energy and raw materials. August's current account shortfall was attributed to a deficit of $4.45 billion in the goods balance.
In fact, the country reported a trade deficit for the sixth consecutive month in September for first time since 1995. The losing streak is a cause for concern. The export-oriented Korean economy is struggling with runaway inflation, higher interest rates and the rapidly declining value of the local currency against the U.S. dollar.
The economic outlook is become bleaker as there are many downside risks, such as the U.S.-initiated aggressive monetary tightening, the prolonged Russian war on Ukraine, China's economic slowdown and a looming global recession. It is necessary for the Yoon Suk-yeol administration to overcome the mounting challenges to prevent the country from plunging into a crisis reminiscent of the 1997-98 Asian financial crisis.
The current account deficit, if combined with a fiscal deficit, could deal a fatal blow to Asia's fourth-largest economy. The country's consolidated fiscal balance is expected to post a deficit of 70 trillion won ($49 billion) this year after posting a shortfall of 30 trillion won in 2021, 71 trillion won in 2020 and 12 trillion won in 2019.
The current account and the fiscal balance are the two major yardsticks showing a country's economic strength and stability. They have a direct effect on a nation's sovereign ratings and international creditworthiness. Thus, the Yoon administration should not try to downplay the dangers of the twin deficits.
However, the BOK said the current account deficit is a temporary phenomenon, expecting the account to return to a surplus in September. Finance Minister Choo Kyung-ho dismissed worries about an economic crisis, predicting that the country will enjoy a current account surplus of $30 billion for the whole year.
But one cannot rule out the possibility of the deficit persisting down the road. Such a shortfall could put more downward pressure on the value of the won against the greenback. A weaker won will stoke inflation further, trigger more interest rate hikes, dampen consumption and lead to a recession. So it is not the time for complacency. Policymakers should work out measures to prepare for the worst-case scenario before it is too late.
South Korea's current account, a broad measure of its global trade in goods and services as well as net earnings on cross-border investments, returned to a deficit in August for the first time in four months. This is raising fears of an economic crisis as the country is likely to continue to suffer a simultaneous phenomenon of twin deficits ― fiscal and current account deficits.
According to preliminary data released Friday by the Bank of Korea (BOK), the country suffered a current account deficit of $3.05 billion in August, compared to a surplus of $790 million in July. Korea enjoyed a current account surplus for 23 months in a row before it posed a deficit of $79.3 million in April.
We have to pay more attention to the issue, because the shortfall came as the country saw its exports growing at a slower place while its imports surged amid high global prices of energy and raw materials. August's current account shortfall was attributed to a deficit of $4.45 billion in the goods balance.
In fact, the country reported a trade deficit for the sixth consecutive month in September for first time since 1995. The losing streak is a cause for concern. The export-oriented Korean economy is struggling with runaway inflation, higher interest rates and the rapidly declining value of the local currency against the U.S. dollar.
The economic outlook is become bleaker as there are many downside risks, such as the U.S.-initiated aggressive monetary tightening, the prolonged Russian war on Ukraine, China's economic slowdown and a looming global recession. It is necessary for the Yoon Suk-yeol administration to overcome the mounting challenges to prevent the country from plunging into a crisis reminiscent of the 1997-98 Asian financial crisis.
The current account deficit, if combined with a fiscal deficit, could deal a fatal blow to Asia's fourth-largest economy. The country's consolidated fiscal balance is expected to post a deficit of 70 trillion won ($49 billion) this year after posting a shortfall of 30 trillion won in 2021, 71 trillion won in 2020 and 12 trillion won in 2019.
The current account and the fiscal balance are the two major yardsticks showing a country's economic strength and stability. They have a direct effect on a nation's sovereign ratings and international creditworthiness. Thus, the Yoon administration should not try to downplay the dangers of the twin deficits.
However, the BOK said the current account deficit is a temporary phenomenon, expecting the account to return to a surplus in September. Finance Minister Choo Kyung-ho dismissed worries about an economic crisis, predicting that the country will enjoy a current account surplus of $30 billion for the whole year.
But one cannot rule out the possibility of the deficit persisting down the road. Such a shortfall could put more downward pressure on the value of the won against the greenback. A weaker won will stoke inflation further, trigger more interest rate hikes, dampen consumption and lead to a recession. So it is not the time for complacency. Policymakers should work out measures to prepare for the worst-case scenario before it is too late.
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