Korea is an export-driven economy. The trade deficit is showing signs of becoming chronic in the last days of the Moon Jae-in administration.
Exports increased 12.6 percent to $57.69 billion in April from the same month of last year, according to the Ministry of Trade, Industry and Energy. Meanwhile, imports grew 18.6 percent on-year to $60.35 billion. As a result, the trade balance stayed in the red for the second successive month. Except for February, which saw a small surplus of $840 million, the trade balance was in a deficit for four months from December last year. The trade deficit widened greatly from $140 million in March to $2.66 billion last month.
The country’s current account was in the black in February for the 22nd straight month, but the surplus was on the decline. Considering that trade generally has the largest impact on the current account balance, the current account for March is likely to turn into the red.
If the current account goes into the red when it is announced this month, the Yoon Suk-yeol administration will start off with “twin deficits” along with an astronomical fiscal deficit run by the administration under President Moon Jae-in.
Korea has not seen twin deficits since the 1997 currency crisis which led to a bailout by the International Monetary Fund.
The trade deficit is largely attributable to soaring international energy and grain prices affected by the prolonged war in Ukraine, global supply disruptions and China’s COVID-19 lockdowns. It is unclear when these external factors will be resolved.
Fiscal deficit has already snowballed due to the Moon administration’s populist policies. Consolidated fiscal deficits expanded from 12 trillion won ($9.4 billion) in 2019 to 75.4 trillion won last year.
Due to the worsening terms of trade, real gross domestic income which shows a nation’s real purchasing power nudged up 0.1 percent year-over-year in the first quarter. It was the smallest increase after the second quarter of 2020, when the figure was a negative 1.8 percent amid an economic impact from the COVID-19 pandemic.
A weakening Korean currency and rising US interest rates are accelerating an overseas outflow of foreign funds. The Korean economy may be trapped in a vicious circle.
Consumption dipped 0.5 percent and facility investment went down 2.9 percent in March, according to Statistics Korea. Indices of current and future economic situations fell, showing that economic activities were shrinking. To make matters worse, prices have hovered over 3 percent for six straight months. Signs of stagnation amid high inflation have become clear.
One of the means available to the government in times of an economic downturn is to stir up demand by expanding fiscal expenditures or by supplying more money through financial institutions. But the current situation makes it hard to utilize those tools.
Rather, the US is tightening money supply by raising interest rates. Korea is in a position where it cannot do anything else but follow suit to prevent capital outflow.
Public finance, a useful tool to tide a country over in an economic crisis, has already reached the breaking point. Due to the Moon administration’s wasteful tax spending, national debt mushroomed by 400 trillion won to top 1,000 trillion over the past five years.
The debt-to-GDP ratio surpassed 50 percent. Conditions are not suitable to issue new bonds to stimulate the economy.
For the past five years, about 2 million full-time jobs vanished. Housing prices in Seoul and its surrounding areas have skyrocketed.
If prices and interest rates keep rising simultaneously in these circumstances, the livelihoods of ordinary people will get more difficult.
All of these complicated problems will be carried over into the new government. The Moon administration has left a hard task of structural reforms to the new government.
By Korea Herald (email@example.com