[Viewpoint]This deficit is a red warning flagDuring the spring of 1996, there was a heated debate between Bank of Korea officials and journalists who covered the central bank.
The argument started when the bank predicted the current account deficit that year would not exceed $7.9 billion.
The economy already had a current account deficit of $6.5 billion that year and it was only April, so the journalists did not agree with the bank’s forecast.
They said, naturally, “how could the bank keep the current account deficit to $7.9 billion at the end of the year?”
At that time, Korea’s exports were sluggish and the service sector deficit was snowballing. Almost nothing indicated that the Korean economy would recover. However, the executives of the central bank insisted the forecast was accurate.
They were wrong.
The current account deficit that year reached $23.1 billion, three times higher than the central bank’s forecast. Korea’s economy recorded another deficit the next year and financial companies covered the deficit by borrowing short-term funds from overseas.
However, the government and the central bank kept insisting the fundamentals of the Korean economy were strong.
Finally, when the national coffers were drained toward the end of 1997 and Korea suffered a lack of liquidity in foreign currency reserves ― the foreign exchange crisis broke out.
Considering the fact that the economy recorded enormous deficits year after year, it was, in a way, a natural consequence.
The ugly part was that there were so many government and central bank officials who claimed, in an effort to evade responsibility for causing the financial crisis, that they had issued warnings in advance about the possible outbreak of a foreign exchange crisis.
It was hard to find anyone who sincerely reflected on their mistake of overlooking the dangers caused by a runaway current account deficit.
Exactly 10 years later, Korea’s current account is again in a worrisome state.
The current account deficit in April was the highest it’s been since the foreign exchange crisis. And the accumulated deficit from January to April this year has exceeded $3.5 billion.
Ever since the foreign exchange crisis 10 years ago, we’ve felt anxious any time the current account deficit has risen.
However, the central bank again says confidently, “there is nothing to worry about,” and that “it is possible to record a surplus of $2 billion this year.”
They explained that the deficit was due to seasonal dividend payments made to foreign shareholders, which reached a peak in April.
The Ministry of Commerce, Industry and Energy also said, “It is necessary to consider the general trend of the economy. There is no need to pay too much attention to the short-term economic index.”
But I wonder whether there is nothing to worry about in our economy, except the dividend payments to foreign investors.
I still cannot bring myself to believe it. First of all, the deficit in the service sector, including education, tourism and health, is growing ever larger.
As a growing number of people go abroad, the deficit in the service sector between January and April reached $7.6 billion. It is an increase of $1.3 billion compared to the same period last year.
The trade balance is also showing signs of an imbalance.
The trade deficit with Japan between January and April exceeded $10 billion, an increase of 20 percent in four months, which is the highest in history.
During the same period, the trade surplus with China decreased 17 percent to $5.2 billion.
Korean products lagged behind Japanese products due to the strong Korean won.
They were also chased by Chinese products in the market.
In the past, Korea had a surplus after it filled in the service sector deficit with the surplus from commodity exports.
Korea also could fill its trade deficit with Japan with a surplus in trade with China.
Now, the balance of trade between the two is being shaken to its foundation.
Unlike the Bank of Korea, private economic research institutes predict that Korea’s current account will turn red for the first time in 10 years and that the deficit scale will amount to $4 to $5 billion this year.
They also worry that the deficit will grow larger next year.
The current account is a record of a country’s international competitiveness. If the current account of a country is in the red, its economy is not healthy even if other economic indices look good.
For a country such as Korea, which relies on the overseas market for more than 70 percent of its economic activity, that is even more true.
The central bank’s “Economic Index Handbook,” says that personal incomes will decrease and the rate of unemployment will rise if the current account records a consecutive deficit.
It would be a sheer lie to say that the overall national economy will not be affected adversely even if the current account is in bad shape.
Unless Korea is in a position to fill its deficit by issuing more dollars in the market, as the United States could do if its deficit grew to an unbearable level, there is no such option for us.
Moreover, it is not easy to reverse the trend once the current account turns to red, as past experiences show.
Korea suffered from chronic deficits annually until 1985.
In the later part of the 1980s, Korea’s economy was able to recover its current account surplus thanks to the low price of oil, the low exchange rate of the dollar and low interest rates, but it recorded a deficit again for seven years, from 1990 through 1997, except in 1993.
Although it is belated, the government and the central bank should sincerely study the unusual signs coming from the current account.
They must study whether the exchange rates are at a proper level for Korean businesses, whether the chronic loss in the service sector can be reduced or whether there is a way Korean investors can earn dividends in the overseas capital market.
They should not repeat their ugly behavior of changing their statements after a crisis occurs, a crisis that they should have prevented in the first place.
*The writer is an editorial writer of the JoongAng Ilbo.
by Ko Hyun-kohn