Income from overseas factories is swelling a South Korean current account surplus that’s got so big it’s becoming a problem.
The excess reached $47.1 billion in the seven months through July, according to data today from the Bank of Korea, which forecasts a record $84 billion for 2014.
The government estimates a surplus equivalent to 5 percent of gross domestic product this year, adding to pressure for the won to extend gains that have already made it Asia’s best performer over the past six months. The International Monetary Fund’s Christine Lagarde said as early as last year that reducing the figure was “desirable” while Finance Minister Choi Kyung Hwan warned this year that excessive surpluses could create difficulties.
“The surplus itself is a good thing but its size now is exceptional and worrisome as it pushes up the won,” said Park Chong Hoon, an economist at Standard Chartered Plc. in Seoul. “Korea has never had this much surplus and we’re seeing a contrast from the mid-1990s when we had to borrow from others.”
Deficits were a feature of the South Korean economy in the lead up to the Asian financial crisis of 1997 and the IMF-led bailout of the country. The trauma of those events spurred the nation to 16 straight annual surpluses through 2013.
The record excess may boost the currency to levels reached prior to the 2008 global credit crisis, Lee Sung Hee, a managing director at JPMorgan Chase & Co. in Seoul, said earlier this month. The won traded at 1,013.39 per dollar at 12:32 p.m. local time after earlier touching 1,012.95, the highest in more than a month.
“An excessive surplus may create problems,” Choi said during a parliamentary hearing in July for his approval as minister. “As a small open economy relying on imported fuels and commodities with free foreign capital movements, we need to maintain an appropriate level of current-account surplus.”
In July, the excess in goods trade was $6.9 billion, with the primary income surplus at $1.5 billion. Income from direct investment overseas, which rose to a record $16.6 billion last year, was $1.5 billion.
Rising investment income contributing to the change, with Samsung Electronics Co., Hyundai Motor Co. and others increasing overseas production to gain better market access and hedge against currency volatility.
“The biggest notable change seen in the current account balance structure from mid-2000s is the rising income from overseas factories,” Roh Chung Seak, head of balance of payments team at the Bank of Korea, said on Aug. 22.
Overseas production of Korean smartphones increased to over 80 percent of total smartphone production in 2013, from 16 percent in 2010, according to a Standard Chartered report on Aug. 21. Overseas automobile production rose to 42 percent in 2012 from 17 percent in 2005, the report showed.
“The problem with the surplus from the government’s perspective is that the money from overseas factories of Korean companies isn’t helping the economy at home,” Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc., said by phone on Aug. 21. “Also, the strong surplus will continue to push up the won and hurt exports.”
Samsung Electronics, the nation’s biggest exporter, has lamented the currency’s gains, saying this was partly to blame for a drop in second-quarter earnings. Hyundai Motor, South Korea’s largest automaker, saw second quarter profits drop as the stronger won eroded overseas earnings.
President Park Geun Hye’s is trying to stoke domestic demand by increasing wages and consumption to make the nation less reliant on exports by conglomerates like Hyundai and Samsung, known as chaebol. Increasing overseas investment can undermine spending and job creation in South Korea.