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South Korea August trade deficit hits record, adding pressure on won

South Korea August trade deficit hits record, adding pressure on won

A truck carrying a shipping container travels past cranes at Pyeongtaek port in Pyeongtaek, South Korea on Jul 9, 2020. (File photo: Reuters/Kim Hong-ji)

SEOUL: South Korea's export growth slowed in August but imports accelerated, widening the trade deficit to a record amount and adding downside pressure on the won, already hovering at over 13-year lows.

Outbound shipments grew 6.6 per cent in August from the same month a year earlier, trade ministry data showed on Thursday (Sep 1), beating 5.5 per cent tipped in a Reuters poll of analysts but slower than a 9.2 per cent rise in July.

Imports jumped 28.2 per cent, much faster than 21.8 per cent in the previous month and 22.9 per cent tipped in the survey, to reach the biggest monthly amount on record.

That brought the trade balance to a US$9.47 billion deficit, nearly double the previous month's US$4.80 billion, marking a fifth consecutive month in the red and the biggest monthly amount on record.

"Although export growth slowed, imports kept up their pace due to high commodity prices, with crude oil accounting for more than half of South Korea's imports", said Lee Seung-hoon, chief economist at Meritz Securities.

"The trade balance will remain in deficit for some time, but it is more likely to narrow than widen going forward, as oil prices are certainly in a downtrend and are reflected in import prices with a one-month lag".

The record trade deficit puts more pressure on the South Korean won, which has weakened more than 11 per cent against dollar so far this year to the lowest level since April 2009.

"Counter-intuitively, we have found that the trade balance has a much higher correlation with the won than the current account balance", Standard Charted said in a research note published last week.

"We do not expect the trade account to turn supportive of the won in the near term. Slowing global growth and external demand will likely keep the trade account under pressure, outweighing any benefits from a pullback in commodity prices."

The Bank of Korea last week raised its policy rate by a quarter-percentage point and signalled more tightening, in part to counter the won's weakness, which it attributes to the Chinese yuan's depreciation and continuing trade deficits.

By destination, shipments to the United States and European Union gained 13.7 per cent and 7.3 per cent, respectively, but those to China were down 5.4 per cent, extending losses to a third month.

Sales of petroleum products surged 113.6 per cent and cars rose 35.9 per cent, while the country's biggest-selling item, semiconductors, fell 7.8 per cent.

Source: Reuters/st
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