Mounting e-flation fears lead to grim outlook for Korean economy

2023.09.20 13:41:01 | 2023.09.20 14:30:24

[Photo by Yonhap]이미지 확대

[Photo by Yonhap]

Rising oil prices amid production cuts by major oil producing countries are casting a dark cloud over South Korea’s trade balance, which had been on the road to recovery.

International oil prices were stable at about $70 per barrel in the first half of 2023, helping Korea enjoy a trade surplus for three consecutive months until August. Since July, however, energy prices have resumed their upward trend, dealing a big blow to a country with a high level of overseas dependence.

The price of West Texas Intermediate (WTI) crude oil closed at $91.48 per barrel on the New York Mercantile Exchange on Monday local time, while Brent crude oil futures on the London-based ICE Futures Exchange closed at $94.43, both hitting yearly highs.

According to a Maeil Business Newspaper analysis on import and export data from the Korea Customs Service on Tuesday, the country’s imports of three major energy commodities - crude oil, gas, and coal - amounted to $98.42 billion in the first eight months of this year, nearing the $100 billion-mark, accounting for 51.6 percent of last year’s three largest energy imports worth $190.86 billion.

The problem is that the increased energy imports are affecting the country’s barely recovering trade balance and inflation at the same time. According to the Ministry of Trade, Industry and Energy, the trade balance recorded a surplus of $870 million last month, the third consecutive month of surpluses since June.

The trade balance had been in the red for a 15 consecutive month from March 2022 to May 2023 and has only recently returned to the positive territory in the second half of the year on the back of a recovery in chip and automobile exports and lower energy prices. Inflation is an even greater concern, with consumer price inflation re-entering the 3 percent range at 3.4 percent in August for the first time in three months, and the upward pressure continues to grow.

Concern is growing that the trade deficit will widen as energy imports result in losses despite strong exports. Observers note that rising import prices will lead to higher consumer prices, which will reduce real income and eventually contract consumption. There is also concern that Korea could see another severe e-flation, or energy-driven inflation, that it experienced last year, when the largest-ever increase in three major energy prices pushed consumer price inflation to as high as 5.1 percent, a 24-year high since the foreign exchange crisis in 1998, and the country‘s trade deficit to a record $47.79 billion.

Korea also has a week energy import structure compared with other countries. According to the Hyundai Research Institute (HRI)’s data on oil dependence, or crude oil consumption as a percentage of gross domestic product, based on statistics from the International Monetary Fund (IMF) and British Petroleum (BP), Korea ranked first among Organization for Economic Cooperation and Development (OECD) member countries at 5.7 barrels. Crude oil consumption per capita was also high at 18 barrels, ranking fourth among the OECD countries.

The HRI estimated last year that the economic growth would fall by 0.3 percentage points and the current account by $30.5 billion if the average annual international oil price reaches $100 per barrel as of last year.

According to the Bank of Korea, the nation’s external dependency was 92.8 percent in the second quarter this year, down from 99.8 percent last year but up from 78.6 percent in 2019 before the Covid-19 pandemic. External dependency is the total value of imports and exports divided by the gross national income (GNI) that indicates how much the Korean economy relies on foreign trade. Soaring energy prices, such as high oil prices, have led to the increase in external dependency.

Experts worry that the ongoing trade deficit could lower the country’s external credit rating in the long run. “We may survive the next few years, but we will be very vulnerable to external shocks on shrinking foreign exchange reserves if the trade deficit continues,” according to Shin Se-don, professor of economics at Sookmyung Women’s University. “There is a high risk that the sovereign credit rating, a measure of the country’s status in the medium to long term, will decline.”

However, others say that the trade deficit is not necessarily a negative sign. “A trade deficit can be evidence of a country’s proactive investment activities,” Park Ji-hyung, a professor at Seoul National University’s School of Economics, said. “There is room for positivity in the sense that the country is securing its future competitiveness.”

By Kim Jung-hwan, Lee Hee-jo, and Choi Jieun

[ⓒ Pulse by Maeil Business Newspaper &, All rights reserved]