The Bank of Korea: "Current Account to Turn Surplus in May... April Deficit is Temporary" [Q&A]

Bank of Korea April Balance of Payments (Preliminary) Press Briefing

[Image source=Yonhap News]

The Bank of Korea evaluated the current account deficit of $290 million in April as a temporary factor caused by dividend payments to foreigners. It forecasted that from May onwards, the impact of dividends would disappear, and the current account would turn to a significant surplus.

Song Jae-chang, head of the Financial Statistics Department at the Bank of Korea, said at the 'April Balance of Payments (provisional)' press briefing on the 11th, "Exports are expected to continue to perform well, and a favorable current account surplus trend will continue," adding, "The first half current account forecast is expected to be smoothly achieved."

Regarding the high level of international oil price import costs, he explained, "The rise in international oil prices in March and April was reflected with a time lag." On the increase in crude oil imports, he said, "Along with the rise in import costs, the increase in crude oil import volume was due to domestic refiners raising their operating rates in April."

Below is a Q&A with Director Song.

- The deficit in dividend income was large. How big is this deficit compared to previous periods?

▲The dividend income balance showed a deficit of $3.58 billion. This is the largest deficit in three years since April 2021, when it recorded a $4.48 billion deficit.

- Is the increase in the deficit size influenced by the government's value-up program?

▲Rather than the impact of the value-up program, the dividend income is evenly distributed throughout the year due to differences in institutional settlement dividend laws, corporate settlement periods, and dividend payment practices in each country. In Korea, the December settlement is done at the end of March, and dividend payments are concentrated in April as a result.

▲This April's primary income balance showed a deficit of $3.37 billion due to dividend payments made to foreigners. The five-year average from 2018 to 2022 was a deficit of $3.53 billion, so it can be seen as a similar level. Last year, dividend income temporarily increased due to corporate tax reduction benefits. This year, dividend income decreased while dividend payments increased, resulting in a larger deficit than last year. Nevertheless, dividend income is considered to be coming in well.

▲From May onwards, the primary income balance is expected to be favorable considering the accumulated primary income surplus from January to April, the increase in overseas direct investment, and the increase in dividend income due to the improvement in the global IT market.

- You expected the surplus to expand in May. Is it possible to achieve the first half forecast?

▲Exports are expected to continue to perform well, leading to a favorable current account surplus trend, so the first half current account forecast is likely to be smoothly achieved. However, there are uncertain factors such as geopolitical risks, the US-China trade dispute, the pace of IT market expansion, and fluctuations in international oil prices and exchange rates.

- China’s exports are relatively small. Is there a possibility that exports to the US will surpass exports to China?

▲Exports to the US have been increasing since last year. Nevertheless, it is true that exports to China remain the largest. The trend of increasing exports to the US is clear. Exports to China will depend on the pace of China's economic recovery.

- Direct investment dividend income increased by $15.6 billion annually last year due to tax reform but is $7.7 billion this year, less than in 2022. Was the effect of tax reform temporary only for last year?

▲It is difficult to compare with last year because in January last year there was a corporate tax reduction benefit on dividend income from overseas subsidiaries. Dividend income from direct investment continues to increase. It is expected to be similar to the average from 2018 to 2022 in normal years.

- The import cost of international oil prices in April was $87.1. How large is this compared to previous years, and how much did it affect imports?

▲The average Dubai crude oil price in April was $87.1, a 5.7% increase compared to April last year. This is the highest level since December last year based on import cost. The high import cost is due to the time-lagged reflection of the rise in international oil prices in March and April. The increase in crude oil imports is due to both the rise in import costs and the increase in import volume. Domestic refiners raised their operating rates in April, which also increased crude oil import volume.