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

The Korea Development Institute (KDI) announced in its revised economic outlook on August 19 that it projects this year's current account surplus at 359.7 billion dollars and next year's at 356.2 billion dollars. These figures represent an upward revision of 120.7 billion dollars and 142.5 billion dollars respectively compared to the forecasts made in May. This is an enormous amount, equaling nearly 15% of the country’s gross domestic product (GDP).

On August 10, the International Financial Center reported that the average current account surplus-to-GDP ratio projected by eight major global investment banks (IBs) for this year was 14.7%, which is not much different. In its report on July 5, Citi even forecast a current account surplus of 405 billion dollars for this year, estimating the surplus-to-GDP ratio at 18.5%.

It may be difficult to grasp just how large KDI’s projection of a 359.7 billion dollar current account surplus for this year is. Based on a KRW-USD exchange rate of 1,400 won, this amounts to 503.6 trillion won. Considering that the government’s budget for this year is 727.9 trillion won, it is equivalent to about 70% of the national budget.

It may also be hard to appreciate the scale of a current account surplus equal to 15% of GDP. One of the three criteria used by the United States to designate countries for in-depth analysis for currency manipulation is having a current account surplus exceeding 3% of GDP. Surpassing just 3% is enough to prompt suspicions of intentionally manipulating currency to excessively boost the current account surplus — let alone 15%.

While it might seem ideal to have a massive current account surplus, that is not always the case. Economic theory generally views a current account surplus-to-GDP ratio of within ±3% as appropriate.

Such a large surplus can have a negative impact on the domestic economy. Externally, an excessive current account surplus can negatively affect export competitiveness due to a decline in the KRW-USD exchange rate. Recall the late 2000s, when the shipbuilding industry was booming and shipbuilders’ forward-dollar selling led to a stronger won, prompting aggressive intervention by monetary authorities (who made desperate efforts to keep the exchange rate around 1,100 won per dollar). Additionally, current account surpluses typically result in increased foreign exchange reserves, which come with their own management costs.

Nevertheless, under the current emergency circumstances, a huge current account surplus is greatly helping to maintain external balance. The KRW-USD exchange rate has recently fallen below the 1,400 won mark for the first time in 11 months. Just two months ago, it was at 1,550 won. This would have been unlikely without the enormous current account surplus.

The large current account surplus is offsetting a range of factors contributing to the weakness of the won. During U.S. President Donald Trump’s term, it was agreed to invest a total of 550 billion dollars in the United States. Even last year, there were calls for the U.S. to establish a currency swap agreement with Korea to calm exchange rate instability during negotiations. The surplus has also counteracted downward pressure on the won from sources such as rising oil prices due to the U.S.-Iran war, growing economic uncertainty, and the increased overseas investment by domestic retail investors.

The challenge lies ahead. If a current account surplus of 350 billion dollars is expected next year, can the current balance be sustained? Although new variables could emerge, the trend going forward may shift more toward concerns over an appreciating, rather than a depreciating, won.

Abroad, there are issues of rising government bond yields in the U.S., Japan, and major European economies. Large and persistent fiscal deficits, as well as stubborn inflation caused by the prolonged U.S.–Iran war, mean these issues are unlikely to be resolved soon. For Korea, these are factors that weaken the dollar and push the exchange rate lower.

The U.S. shows little willingness to address its large fiscal deficit and national debt. Whether it even possesses the means to do so is doubtful. The U.S. Treasury cannot stop the national debt from increasing, but it cannot tolerate a rise in Treasury yields. Although a Treasury buyback was announced on August 19, it will likely prove to be a stopgap measure. The Federal Reserve should raise the key interest rate, but it is unclear whether Fed Chair Kevin Warsh, nominated by President Trump, can make such a decision.

In any case, considering the various domestic and international economic conditions, it is fortunate, for now, that Korea can view its massive current account surplus with at least some peace of mind.

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