South Korea's soaring energy import costs raise trade deficit risk

Seoul

SOUTH Korea faces the prospect of a return to a trade deficit, preliminary data show, as geopolitical and virus risks weigh on global demand for its products, while escalating energy and commodity prices boost costs.

South Korea's exports for the first 20 days of March advanced 10.1 per cent from a year earlier, led by semiconductors and oil products, the customs office said in a release on Monday (Mar 21). Average daily shipments rose 26.4 per cent. Overall imports climbed 18.9 per cent - fuelled by energy - for a deficit of US$2.1 billion.

The wide divergence between the headline and daily average figures is due to 2 fewer business days this year, with Mar 9 a holiday for a presidential election. Daily average shipments for all of February rose 17.6 per cent.

Russia's invasion of Ukraine has sent energy and commodity prices soaring, weighing on international demand. That is a double blow to South Korea, which relies on raw materials imports to manufacture high-tech products that it then sells to the world.

The Bank of Korea last month sharply raised its inflation forecast and also suggested the war in Ukraine could weigh on South Korea's economic growth, complicating the monetary policy outlook. The central bank has hiked interest rates 3 times since August to try to cool inflation.

"We appear to be headed for an unavoidable deficit," said Yoon Yeo-sam, an analyst at Meritz Securities in Seoul. "The burden of costlier energy imports is growing bigger even as semiconductors do well. We may not see a surplus return until oil prices drop to around US$90 per barrel."

South Korea releases trade data earlier than most countries and the wide range of its exports, from semiconductors to cars, makes it a leading indicator of global economic activity.

Demand for automobiles is a particular concern following the imposition of sanctions on Russia, as it had been a major customer for carmakers such as Hyundai Motor Co. Overall exports of both cars and automobile parts fell in the first 20 days of the month, while the sales of ships also slid, the customs data showed.

Trade deficits have been an increasing concern for South Korea as its currency has been one of Asia's worst performers in recent months. The nation posted back-to-back deficits in December and January amid higher energy costs, before swinging back to a trade surplus last month.

Compounding the problems for exporters is the recent lockdown of Shenzhen in response to mounting virus cases in China, the biggest trading partner of South Korea. Today's data showed imports of crude oil climbed 57.8 per cent and those for gas soared 114.3 per cent. Purchases of oil products advanced 52.5 per cent.

Exports to China rose 11.3 per cent between Mar 1 to 20 from a year earlier, those to the US advanced 6 per cent, and to Japan, gained 2 per cent. Shipments to the European Union fell 3.9 per cent. Overallc semiconductor shipments increased 30.8 per cent. Exports of cars fell 18.1 per cent, while oil products increased 79 per cent. BLOOMBERG