Current account excess continues to increase

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Current account excess continues to increase

Income from overseas factories is swelling a Korean current account surplus that’s got so big it’s becoming a problem.

The excess reached $47.1 billion in the seven months through July, according to data yesterday from the Bank of Korea, which forecasts a record $84 billion for 2014.

The current account surplus has been on a rally for 28 consecutive months. The surplus in the first seven months was $47.1 billion, which is even 20 percent more than the same period last year.

The government estimates a surplus equivalent to 5 percent of gross domestic product this year, adding to pressure for the won to extend gains that have already made it Asia’s best performer over the past six months. The International Monetary Fund’s Christine Lagarde said as early as last year that reducing the figure was “desirable” while Finance Minister Choi Kyung-hwan warned this year that excessive surpluses could create difficulties.

“The surplus itself is a good thing but its size now is exceptional and worrisome as it pushes up the won,” said Park Chong-hoon, an economist at Standard Chartered.

“Korea has never had this much surplus and we’re seeing a contrast from the mid-1990s when we had to borrow from others.”

Deficits were a feature of the Korean economy in the lead up to the Asian financial crisis of 1997 and the IMF-led bailout of the country. The trauma of those events spurred the nation to 16 straight annual surpluses through 2013.

The record excess may boost the currency to levels reached prior to the 2008 global credit crisis, Lee Sung-hee, a managing director at JPMorgan, said earlier this month.

“An excessive surplus may create problems,” Choi said during a parliamentary hearing in July for his approval as minister. “As a small open economy relying on imported fuels and commodities with free foreign capital movements, we need to maintain an appropriate level of current-account surplus.”

In July, the excess in goods trade was $6.9 billion, with the primary income surplus at $1.5 billion. Income from direct investment overseas, which rose to a record $16.6 billion last year, was $1.5 billion.

Rising investment income is helping driving this change, with Samsung Electronics, Hyundai Motor and others increasing overseas production to gain better market access and hedge against currency volatility.

“The biggest notable change seen in the current account balance structure from mid-2000s is the rising income from overseas factories,” Roh Chung-seak, head of balance of payments team at the Bank of Korea, said.

Overseas production of Korean smartphones increased to over 80 percent of total smartphone production in 2013, from 16 percent in 2010, according to a Standard Chartered report on Aug. 21. Overseas automobile production rose to 42 percent in 2012 from 17 percent in 2005, the report showed.


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