[Editorial] More red signs for economy

A host of new red signs are popping up for the South Korean economy, which is bad news for policymakers already struggling to tame high inflation and tackle the economic slowdown.

There are three worrisome developments. First, the country posted a record current account deficit in January. Second, the Korean currency is losing its value against the US dollar at a rapid clip. Third, investors are worried about the ripple impact from the collapse of the San Francisco-based Silicon Valley Bank, hit by a sudden bank run and capital crisis.

It is not a big surprise that the nation suffers a current account deficit, given the continued troubles with key export items such as semiconductors and rising raw material prices. But the January figure must not be brushed off as a temporary dip, as the scope of downward figures is unprecedented.

Korea’s current account shortfall reached $4.52 billion in January, compared with a surplus of $2.68 billion in December, the Bank of Korea data showed Friday.

The figure marked the biggest-ever monthly current account deficit since the bank began to compile related data in January 1980.

The main culprits were sluggish exports aggravated by a slower demand for chips and a sharp increase in the service account deficit due to the rising overseas travel of Koreans following eased coronavirus rules.

Exports dropped 14.9 percent on-year in January, extending a downward streak for the fifth straight month, as local chipmakers such as Samsung Electronics and SK hynix faced weakening demand for semiconductors from major markets. On a customs clearance basis, overseas shipments of chips plummeted 43.4 percent on-year in January. In contrast, imports climbed 1.1 percent during the same period.

The BOK said the record amount of the deficit in January is expected to return to normal levels in February in consideration of a smaller trade deficit last month. Government officials said current account numbers would improve in the second half of this year, helped by the reopening of the Chinese market that had slowed its economy activities to battle the pandemic.

But experts caution that it policymakers should not depend on versatile external factors as a reason to remain optimistic. In fact, external elements are increasingly turning hostile for the export-driven Korean economy.

While high interest rates and inflation remain unchanged, the Korean won has been under great pressure in recent weeks. The Korean currency closed at 1,324.2 won against the greenback Friday, marking the lowest value in four months since Nov. 29 when it traded at 1,326.6 won.

The Korean currency lost 7.36 percent in a month, the steepest fall among major countries, including Japan, the currency of which lost 4.69 percent. The DXY, an index of the value of the US dollar relative to a basket of foreign currencies, rose 2.85 percent over the same period. This means the depreciation of the Korean won is more than twice as fast as the appreciation of the US dollar.

The weakening of the Korean won is largely attributed to the strong US dollar, extended trade and current account deficits, a capital outflow linked to the gap between interest rates in Korea and the US and an increase of new overseas stock investment accounts opened by local investors.

The US Federal Reserve Board is now expected to increase the pace of rate hikes, as Chairman Jerome Powell cautioned the rates are likely to head higher as the latest economic data came in stronger than previously expected.

The tighter monetary policy of the US Fed is feared to widen the gap in interest rates between Korea and the US, posing a dilemma for the BOK, which held rates steady at 3.5 percent last month.

The sudden collapse of SVB, a tech-focused lender, marks the second-biggest bankruptcy of an American bank in history. As SVB’s key clients are tech and health care startups, there are concerns about the possibility that other startups and banks might confront similar liquidity problems. The woes at SVB already alarmed Korean startups and venture capital firms with deposits in the bank.

The government’s economic policymakers are urged to come up with policies to tackle the ballooning current account and trade deficits, while keeping close tabs on the growing versatility in the foreign exchange market and the spillover effect from the collapse of SVB.