Balance of Payments Analysis: Republic of Korea
Current Account Overview:
As the recession spread across the globe in 2009, demand for goods dramatically decreased and South Korea’s current account surplus diminished significantly. However, since the global economic recession in 2008-2009, the Republic of Korea has experienced healthy growth in its current account trade surplus, expanding from $11,794.50 million in 2007 to $89,220.10 million in 2014. Korea’s exports are primarily led by semiconductor and wireless communication devices. Exports of semiconductors grew by 9.2% in 2014 in thanks to the growing demand for memory chips arising from growing demand of mobile devices.
The global recession of 2009 caused less attractive imports and falling demand for exports causing the won to rapidly depreciate, escalating the cost of imports. Inflation combined with fewer exports led to South Korea’s smallest current account surplus since the Asian Economic Crisis of the late-1990s.
Following the crisis, exports increased and imports leveled-off after 2011. Imports then started falling after 2012 as oil prices began to decline. As Figure C demonstrates, oil prices correlate well with South Korea’s import bill. The recession ended and economic activity picked-up and by 2012, South Korea’s exports had increased by 75% from 2009 levels. Large trade surpluses have become the norm ever since.
Financial Account Overview:
From 2008-2011, South Korea ran progressively larger Financial Account deficits. However between 2009 and 2010, South Korea ran a financial account surplus. This was primarily due to Portfolio investment inflows. With South Korea’s large trade surpluses in recent years, excess revenue has been invested abroad in the form of Foreign Direct Investment, and Portfolio Investment. Since 2012 there has been a growing of capital outflow. Unlike some emerging markets that have attracted investors and thus are forced to run financial account deficits, South Korea’s deficit is a clear sign of current account success because the outflows represent Korean investment abroad and should lead to future financial dividends.
The 2008-2009 global financial crisis had a significant impact on the Bank of Korea’s foreign exchange reserves. Its foreign exchange reserves were nearly depleted as a result of an effort to compensate for the dramatic outflow of capital that occurred as illustrated in Figure D. However, as depicted from the Balance of Payments (see Appendix A), the foreign currency reserves have been increasing since mid-2009.
During the 2008 financial crisis, the South Korean economy experienced a dramatic outflow of capital. As a result, the value of the won plummeted against the US dollar, as illustrated in Figure D. In an effort to stabilize its exchange rate in the foreign exchange market, the Bank of Korea, Korea’s central bank, engaged in open market operations in the form of currency swap agreements with other major central banks throughout the world. Since the end of the economic recession in 2012, South Korea has tapered off its debt issuance with
nearly no public debt issued in 2014.
Debt Obligations Overview:
South Korea’s sovereign debt slightly exceeds 35% of GDP. With such a low debt-to-GDP ratio (and most of this debt is issued in Won), South Korea retains high credit ratings with an optimistic future outlook. Facing a liquidity crisis in 2008, the Bank of Korea instituted the issuance of Monetary Stabilization Bonds (MSBs). MSB’s, which carried a two-year maturity and added market competitiveness to BoK bond issuance.
However, if you look at Figure F, South Korea has been running fiscal deficits since 2013 due to government plans to spend more to protect the economy from a slowdown in China. Experts expect that Korea’s overall sovereign debt will increase to 40.1% of GDP by next year—the highest since the ministry began compiling data in 1970. It is currently estimated at 38.5% of GDP for 2015. This level is still sustainable, which is why the country’s bond ratings are relatively positive (see Table B).
