Alarms ringing on the export frontier

Home > Opinion > Editorials

print dictionary print

Alarms ringing on the export frontier

Korea’s trade balance has been running a deficit for the fourth straight month. Exports rose 9.4 percent to $60.7 billion while imports surged by a bigger 21.8 percent to $65.37 billion in July, according to trade data from the Ministry of Trade, Industry and Energy. Exports stayed robust, but energy imports have increased despite persistently high prices. The deficit in July reached $4.67 billion, extending the deficit streak into the fourth month, or the longest period since the 2008 global financial crisis.

Cumulative deficit from January to July hit $15.03 billion, a record high since data has been compiled from 1956. Exports could weaken due to the global economic slowdown from soaring interest rates and inflation in the U.S. and other major economies. Korea faces the risk of incurring twin deficits — red in fiscal and current accounts — for the first time since the 1997 Asian financial crisis.

Deficit has been piling up in our trade with China for the first time in 30 years. The government blamed lockdowns from the virus spread in China, but slowed exports to China could bode badly for Korea’s trade as China still remains its biggest export market.

The government pointed out that other countries like Japan and Germany also have been logging trade deficits. But trade deficits are a bigger worry for Korea, as it experienced a national default crisis in 1997 when foreign exchange reserves thinned from its reduced trade revenue. As trade deficit can help weaken the Korean won, authorities needs to intervene to prevent a further fall in the value of the currency. FX reserve that had reached $469.2 billion in October last year fell to $438.3 billion after financial authorities beefed up dollar-selling intervention to prop up the Korean won. After an international bailout, the International Monetary Fund (IMF) recommended Seoul maintain FX reserve at the $468 billion to 702.1 billion level.

The IMF guideline does not have to be met. Even China with the largest FX holding does not meet the IMF’s guideline. Authorities also argue that foreign liquidity crisis is less of a risk, as Korea holds a larger share of long-term debt in external debt and since the country has been a net credit country with bigger financial assets than debts after 2015. When the private-held external assets are large, they can help bolster the won when the dollar assets are cashed out and brought home.

Still, Korea’s trade deficit and waning FX reserve must be closely watched as they could affect its sovereign rating.

The government must not regard the widening deficit as temporary phenomenon from a spike in energy prices. It must expand export financing and diversify supply chains to help the economy.
Log in to Twitter or Facebook account to connect
with the Korea JoongAng Daily
help-image Social comment?
lock icon

To write comments, please log in to one of the accounts.

Standards Board Policy (0/250자)