Thursday, February 28, 2008

South Korea January 2008 Current Account Deficit

South Korea experienced its biggest monthly current account shortfall in almost 11 years in January and may have to enlarge its deficit forecast for the whole year, the central bank said on Thursday.

The seasonally adjusted current account deficit widened to a provisional $2.03bn in January, the biggest since a $2.21bn loss in February 1997, from a revised $1.07bn deficit in December 2007, the Bank of Korea data showed.

The deficit, which has been swollen by the rising cost of commodities imports just as exports started to slow, means foreign trade will contribute less than before to the economy at a time when the economic outlook is already turning from bad to worse.

In seperately released data we learnt today that companies were growing more worried about the immediate future, with the Korea Chamber of Commerce and Industry’s sentiment index for the second quarter hitting the lowest in more than a year. The chamber’s index, which fell to 97 for the second quarter from 99 for the first quarter, came hours after the central bank’s March survey index for manufacturing firms stood steady at a 9-month low of 86 set in February.

President Lee’s government has already pledged to lower corporate taxes, cut domestic sales taxes on oil products and roll back regulations to boost investment, but the effect will most likely be limited because key risks are from abroad.

The worsening current account performance is negative for the won, which has already been in gradual decline against the dollar since hitting a decade high at the end of October last year.

Yang Jae-ryong, who is head of the Bank of Korea’s international balance of payments team, told reporters that Korea’s current account deficit for 2008 could top the $3bn level previously forecast earlier by the central bank. If this happens it will be the first annual current account deficit in 11 years for South Korea, which has enjoyed a healthy current account performance helped by the won’s sharp drop during the 1997-98 financial crisis. This data comes one week before the central bank reviews interest rates on March 7. The Bank of Korea held rates steady at 5.0 per cent on Feb. 13 for a sixth consecutive month but said it could cut the rates whenever necessary.

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