Question 20N.2.HL.TZ0.1c

South Korea’s current account surplus

1. South Korea, Asia’s fourth-largest economy, has experienced a current account surplus since 2012. South Korea’s large working-age population, which tends to save a large portion of its income for retirement, contributes to the surplus. The South Korean government has expressed concerns about the impact of the high savings on domestic demand and the level of imports. However, it has been predicted that as the population ages the surplus will gradually disappear by 2042.
   
   
2. The South Korean won (South Korea’s currency) recorded the second highest appreciation against the United States dollar (US$) in 2017 among currencies of the G20* nations. The current account surplus, the improved economic conditions and the expectations of an interest rate rise have all helped increase the South Korean won’s value.
   
   
3. The South Korean won officially operates under a floating exchange rate system, but the central bank would intervene if there were major fluctuations in the market that needed to be managed. The US is monitoring the exchange rate policy of South Korea due to the significant trade imbalance between the two countries. If the US identifies that a major trading partner like South Korea tries to limit an appreciation of its currency, then the US may consider tariffs to reduce the imbalance.
   
   
4. South Korea’s financial account in the balance of payments recorded a deficit of US$13 billion in 2018, as Koreans have invested extensively in other countries. Furthermore, foreigners have been reluctant to invest in South Korea due to the trade disputes and the potential of a trade war erupting between the US and China. The US and China are South Korea’s largest trading partners, and South Korea, with its export oriented economy (exports amount to 43 % of gross domestic product [GDP]), is sensitive to external demand shocks.
   
   
5. South Korea’s domestic investment in key areas (such as manufacturing, construction and machinery) fell during 2018, and GDP grew by less than expected. Additionally, private consumption increased only by 0.3 % in 2018, the slowest growth for 4 years. There is also concern about the level of unemployment, especially the high rates of youth unemployment.
   
   
6. Normally, in a situation of low growth, the central bank would implement expansionary monetary policy. However, the US Federal Reserve (the central bank of the US) and the European central bank are considering monetary tightening. If the South Korean central bank does not raise interest rates in line with the US and the European Union it runs the risk that the South Korean won may depreciate. Therefore, the South Korean government has begun discussions on using fiscal policy to help revive the job market and support domestic demand.

[Source: Adapted from: South Korea Current Account, Trading Economics, https://tradingeconomics.com/south-korea/currentaccount;
and Anon, 2018. S. Korean Won’s Appreciation 2nd Highest in G20 Last Year. KBS World Radio,
http://world.kbs.co.kr/service/news_view.htm?lang=e&Seq_Code=133432.]

* G20 members include: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea (South Korea), Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the US and the EU