Korea Faces Mounting Trade Deficit

  • By Kim Shin-young, Shin Eun-jin

    April 22, 2022 10:48

    Korea faces a second straight month of trade deficits in April amid global inflation. There is little the export-dependent country can do since the causes of surging raw material prices and supply chain disruptions lie mostly overseas.

    The U.S. Federal Reserve's accelerated rate hikes, a slowdown in China's economic growth due to the coronavirus lockdown in Shanghai and soaring international oil and grain prices due to Russia's invasion of Ukraine coincide to form a perfect storm.

    As the won weakens against the U.S. dollar, import prices are rising for Korea, adding fuel to inflation. The Korean currency fell below W1,200 level to the greenback early last month, the lowest point in 21 months, and the trend continues.

    Moody's on Thursday maintained Korea's sovereign credit rating at its third-highest level of Aa2, but warned that the country faces "a rapid aging of its population which will weigh on growth and raise the government's debt burden, although likely not to the same extent as for similarly-rated sovereigns."


    According to the Korea Customs Service on Thursday, the country's trade account posted a deficit of $5.2 billion in the first 20 days of this month, following a $115.2 million deficit in March.

    Korea's exports increased around 17 percent compared to a year ago buoyed by shipments of semiconductors and petrochemical products, but surging energy prices due to supply chain disruptions and the Ukraine crisis resulted in imports rising 26 percent. Inflationary pressures are exacerbated by rising prices of energy including crude oil.

    Lee In-ho at Seoul National University said, "If inflation worsens, low-income consumers and companies that fail to cope with rising costs will be hit first, and that could affect the entire economy."

    But the Bank of Korea faces a tough time taming inflation. Interest rates were kept at rock-bottom levels to keep the economy afloat during the pandemic, so household debt soared to W1.9 quadrillion amid a run on cheap loans (US$1=W1,236). If the BOK raises interest rates further, loan defaults could surge.

    The interest rate on credit loans has already increased by 1.6 percentage points from a year ago to 5.3 percent as banks anticipate further BOK rate hikes. Lee Seung-hoon, a researcher at KB Financial Group, said, "If interest rates rise at a time when surging consumer prices pinch household finances, there is a risk of loan defaults spreading."

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