How to Interpret a Massive Current Account Surplus Worth 15% of GDP Over Two Years [Economic Insight]

The Korea Development Institute (KDI), in its 'Revised Economic Outlook' released on August 19, raised its current account surplus forecast to 359.7 billion dollars for this year and 356.2 billion dollars for next year. These figures are up by 120.7 billion dollars and 142.5 billion dollars respectively compared to its forecast in May. This amounts to about 15% of gross domestic product (GDP), an enormous figure.

According to data compiled by the International Finance Center on August 10, the average current account surplus-to-GDP ratio predicted by eight major overseas investment banks for this year was 14.7%, which is not much different. Citi, in a report released on July 5, projected that the current account surplus would reach 405.0 billion dollars this year, with the surplus-to-GDP ratio hitting 18.5%.

You may find it difficult to grasp just how large the KDI’s forecast of a current account surplus of 359.7 billion dollars is for this year. With the won-dollar exchange rate at 1,400 won, this equates to 503.6 trillion won. Given that this year’s government budget plan totals 727.9 trillion won, the surplus accounts for about 70% of the government’s entire budget.

It may also be difficult to appreciate what a 15% current account surplus-to-GDP ratio means. One of the three criteria that the United States uses to designate countries for enhanced scrutiny over currency manipulation is a surplus-to-GDP ratio greater than 3%. Even a little over 3% raises suspicions of excessive current account surplus through currency manipulation—so 15% is extraordinary.

It may seem that a large current account surplus is unconditionally good, but that is not the case. Most economic theories consider a current account surplus-to-GDP ratio within ±3% to be appropriate.

There are negative effects on the domestic economy, but focusing only on the external side, an excessively high current account surplus can negatively impact export competitiveness by causing the won-dollar exchange rate to fall. If you recall the boom in the shipbuilding industry in the late 2000s, the shipbuilders' selling of forward contracts, the resulting appreciation of the won, and the foreign exchange authorities’ strong intervention (desperately trying to keep the exchange rate near 1,100 won)—these difficulties make it easier to understand. Also, a larger current account surplus usually leads to increased foreign currency reserves, but it costs money to manage those reserves.

Nevertheless, in the current emergency situation, a massive current account surplus has been a major factor in maintaining external balance. The won-dollar exchange rate has now fallen below 1,400 won for the first time in 11 months. Just two months ago, it was around 1,550 won, and this drop would have been difficult without the huge current account surplus.

The massive current account surplus is offsetting several factors that would otherwise have led to a weakening won. During President Donald Trump's term, Korea pledged to invest a total of 350.0 billion dollars in the United States, and even last year, there was talk during negotiations that the United States should provide a currency swap to stabilize the won. The impact of the US-Iran war driving up oil prices, economic instability, and the recent increase in overseas investment by domestic individual investors are also generating downward pressure on the won, which is being offset by the large current account surplus.

The concern is what lies ahead. Even if next year sees a current account surplus of about 350.0 billion dollars, can today’s balance be maintained? While other variables may appear, going forward, the focus may shift from worries about a weaker won to concerns about an excessively strong won.

Abroad, the United States, Japan, and major European countries are facing issues with rising government bond yields. Persistent large fiscal deficits and prolonged inflation from the US-Iran war make these problems hard to resolve. For Korea, these act as factors leading to a weaker dollar and a lower won-dollar exchange rate.

The United States has shown no will to solve the problem of its massive fiscal deficit and soaring national debt. It’s questionable whether they even have the ability to do so. The US Treasury is unable to halt the growth of national debt, but will not accept rising US bond yields. Although it announced a Treasury buyback program on August 19, this is likely to be only a stopgap measure. The US Federal Reserve should raise its base interest rate, but it is uncertain whether Kevin Warsh, the Fed chair appointed by President Trump, will make such a decision.

In any case, considering the various current domestic and international economic conditions, for now, it is fortunate that we can regard the ongoing substantial current account surplus with a sense of relief.

This content was produced with the assistance of AI translation services.