Sept. 27 (Bloomberg) -- South Korea's current account deficit widened to the largest in four months in August as higher oil prices raised import costs and more people bought foreign currencies to spend on vacations and study overseas.

Asia's third-largest economy recorded a shortfall of $508.1 million in August compared with a $392.7 million gap in July and $486.5 million a year ago, the Bank of Korea said in Seoul today.

A deteriorating trade balance may damp demand for the South Korean won, which has been the second-best performing currency in the Asia-Pacific region this year. The government forecasts the current account surplus for 2006 will narrow to about a quarter of last year's, while the central bank said this month the surplus may shrink to zero.

``A continued current account deficit isn't good for the economy, as there are more money going out of the country than coming in,'' said Go You Sun, an economist at Daewoo Securities Co. in Seoul. ``The deficit may help limit gains in the won.''

The deficit in July was revised from $212.1 million.

The won fell for a second day, dropping 0.1 percent to 945.30 per U.S. dollar at 11 a.m. in Seoul. The currency has gained 7 percent against the dollar this year, making it Asia's second-best performer behind Thai's baht.

The current account is the broadest measure of trade because it covers the flow of goods, services and money across borders. A deficit represents the amount South Koreans must borrow from foreigners to cover the shortfall between exports and imports.

Overseas Travel

The deficit on the services account, which measures the international flow of travel, transport costs and royalties, widened to $2.1 billion in August from $1.8 billion a year earlier.

The deficit on the travel account expanded to a record $1.4 billion in August.

Summer vacation falls between July and August for most students, increasing the nation's travel deficit as they head abroad. Parents also bought more foreign exchange in August to pay for overseas study costs for their children, the central bank said in today's report.

Imports climbed 23 percent in August from a year earlier. Rising oil prices boosted the import bill in a nation that buys almost all the fuel it uses from overseas. Imports of crude oil surged 44 percent from August 2005.

Exports Increase

Exports gained 17.6 percent from a year earlier, on a customs-cleared basis. Sales of goods to China, the nation's largest export market, have helped stoke overseas shipments and limited the deterioration in the current account.

``A serious deceleration in global economies is unlikely and China's sustained growth, albeit slowing some, should power Korea's exports,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul.

South Korea's government forecasts the current account surplus will narrow to between $3 billion and $5 billion this year from $16.6 billion in 2005. On Sept. 7, the Bank of Korea said the surplus may shrink to zero in 2006 because of higher oil costs and as more people travel abroad.

Still, Deputy Finance Minister Kim Seok Dong said the current account will return to surplus for the month of September as exports increase and oil prices ease.

Oil costs have fallen from records, which will lower the nation's import bill. The price of Dubai crude oil, South Korea's benchmark, surged as much as 34 percent in August from the start of the year. Since then, the price has dropped 22 percent, reducing this year's increase to 6 percent.

Improvement Expected

``Conditions for the September current account balance have improved a lot,'' said Jeong Sam Yong, a central bank official in charge of compiling current account statistics.

``Oil prices have been falling,'' Jeong told reporters in Seoul today. ``Chip prices have been rising. That will help Korea to see double-digit growth in exports in September.''

The nation's trade surplus narrowed to $1.57 billion in August from $1.59 billion a year earlier as imports increased more than exports.

South Korea had an income account surplus of $311.7 million last month compared with a $45.7 million deficit a year earlier. The income account tracks the flow of interest payments, investment income and wages between South Korea and its trading partners.

After seasonal adjustment, the current account surplus was $797.9 million in August, compared with a $778.9 million surplus a year ago. The current account deficit was $1.3 billion in the eight months ended Aug. 31, today's report also showed.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

Last Updated: September 26, 2006 23:01 EDT