While Korea's current account is expected to post a record surplus this year, the momentum looks set to wane next year. The "front-loading exports" effect seen before tariffs took effect in the second half will no longer be available, and if semiconductor tariffs are finalized, a smaller surplus will be inevitable. A Korea-U.S. deal has at least lowered auto tariffs, but they remain higher than in the first half, adding to export burdens.
According to the International Finance Center on the 3rd, as of the end of last month, eight global investment banks (IBs) projected Korea's current account surplus at an average 5.4% of gross domestic product (GDP) this year. That is up 0.3 percentage points (p) from the outlook at the end of Aug. (5.1%). Given that the GDP growth outlook was unchanged at 1.0% over the period, it implies expectations for a larger current account surplus this year.
◇ This year was supported by front-loading exports and semiconductors… could top $110 billion
The sharp improvement in the current account this year owes much to exporters' "front-loading exports." As the United States signaled high tariffs on key industrial products, domestic manufacturers moved up shipments ahead of the tariff imposition and boosted inventories in the U.S. market. In particular, volumes surged in autos, steel, and petrochemicals—sectors subject to product-specific tariffs between Apr. and Jun.—pushing first-half export results above expectations.
Semiconductors, for which tariff rates have not yet been finalized, posted record results thanks to both front-loading exports and an upturn in the industry. Backed by investment demand for artificial intelligence (AI), cumulative semiconductor exports through the third quarter hit an all-time high. Demand rose across high-bandwidth memory (HBM) and DRAM alike. Over the same period, semiconductors accounted for 23% of total exports, up from last year's average of 19%.
The Bank of Korea (BOK) expects the current account surplus to widen further this year. In its Economic Assessment report published on the 23rd, the BOK projected Korea's current account surplus to exceed the previous forecast of $110 billion. That would surpass the all-time high of $105.12 billion set in 2015. The BOK cited an improved goods balance thanks to a semiconductor upcycle and a narrower travel deficit due to an increase in foreign tourists as the main drivers.
A Korea-U.S. agreement reached on the 29th is also expected to help expand the surplus. The two countries agreed to lower the 25% product-specific tariff on automobiles to 15%. They also agreed to apply semiconductor tariffs at a level not disadvantageous compared with rival Taiwan, offering some relief, according to assessments.
However, a smaller current account surplus next year appears unavoidable. That is because the impact will kick in from product-specific tariffs that were not imposed through the first quarter this year, as well as the reciprocal tariff applied since Aug. Unlike automobiles, where tariffs were reduced, steel and aluminum still face a 50% high tariff, making a hit inevitable. If product-specific tariffs are finalized for semiconductors and pharmaceuticals as well, the blow to overall exports will likely be even greater.
Forecasting institutions are lowering their projections for next year's current account surplus. The Korea Development Institute (KDI) projects Korea's current account surplus at $91 billion next year, while the Bank of Korea (BOK) projected $85 billion in Aug. Those figures are 29.4% and 20.8% smaller, respectively, than the BOK's projection for this year's surplus. Hyundai Research Institute even forecast a $68 billion current account surplus next year. It attributed the outlook to a worsening goods balance and weaker transport services due to lower shipping rates.
◇ If the current account surplus shrinks, dollar supply falls… likely to add upside pressure on the exchange rate
A smaller current account surplus can increase downward pressure on the won in the foreign exchange market. When the surplus narrows, fewer dollars flow into the country, leaving the FX market short of dollars. If the reduced dollar supply coincides with external uncertainty and a strong global dollar trend, it could push the exchange rate, now in the 1,400-won range, even higher.
Private institutions are revising their exchange rate forecasts higher for next year. Woori Bank expects the won-dollar rate to rise from an average 1,410 won in the fourth quarter this year to 1,420 won in the first quarter next year. The analysis is that real demand for dollars will increase due to factors including $350 billion in U.S.-bound investment, a key sticking point in the Korea-U.S. tariff talks. Korea Investment & Securities also projected that rising dollar demand will push the rate up gradually from the first to the fourth quarter next year, to 1,370 won, 1,380 won, 1,390 won, and 1,410 won, respectively.
Experts advise diversifying export items and markets. An analysis by the Korea International Trade Association of 92,385 member companies found that when the number of export destination countries increased by one, the risk of export suspension fell by 5.4%, and when the number of export items increased by one, it fell by 1.2%. High-growth companies had more diverse export items and markets and lower concentration, which strengthened their crisis response.
Sim Hye-jung, senior researcher at the Korea International Trade Association's Trend Analysis Office, said, "For the sustainability and stable growth of Korea's exports, strategic diversification of items and markets is essential," adding, "It is important to establish a balanced export strategy that can respond flexibly to external shocks by strengthening tailored support by corporations' size and stage of growth to promote the global expansion of small and midsize companies."