Trade deficit casts clouds on markets, growth

SEJONG -- South Korea is likely to record a trade deficit for the sixth consecutive month, as the nation suffered a trade deficit of $4.1 billion for the first 20 days of September, down 8.7 percent on-year, state data showed Wednesday.

According to the Ministry of Trade, Industry and Energy, the nation posted $32.9 billion in exports while imports increased 6.1 percent on-year to $37 billion over the corresponding period.

It would be the first time in 25 years for Asia's fourth-largest economy to suffer from a trade deficit for the sixth consecutive month, officials said.

During the first 20 days of this month, outbound shipments to China decreased by 14 percent on-year. Exports to the US fell by 1.1 percent, and those to the European Union fell by 15.3 percent.

The worsening trade deficit could have a bigger impact not only on the economy but also on markets, economists warned. It could possibly undermine foreign investor sentiment, as foreign investors may view the export-driven economy as losing its luster, the economists said.

The Korea Economic Research Institute said in a report that the ongoing trade deficit could bring about capital outflow among foreign investors.

Citing the relations between the trade balance and won-dollar exchange rates over the past three years, the institute said the Korean currency lost ground to the US dollar when the balance worsened.

Korea logged a trade surplus of $1.5 billion in August 2021 and a deficit of $9.4 billion in August 2022, the local currency fell by 159.3 won from 1,161 won to 1,320.4 won per dollar over the same period.

A decline in the won’s value will increase worries over losses from exchange rates among overseas investors in the capital market, the institute said.

Based on its analysis on the data held by Statistics Korea between January 2004 and July 2022, the possibility of net-selling among foreign investors increased by 28.3 percent under the trade deficit situation, compared to that of trade surplus, it said.

Local brokerage firm Korea Investment and Securities also predicted that the nation’s gross domestic income will decrease by about 1 percentage point in 2022 on-year amid the worsening trade balance.

Even if prices of imports stop rising as raw material prices get stabilized, export prices are likely to fall faster due to an expected decline in semiconductor prices, it said.

It said this will cause a continuous decline of GDI, which is affected by businesses’ production activities. “GDI will fall almost 1 percentage point this year, compared to the previous year,” the KIS said.

By Kim Yon-se (kys@heraldcorp.com)