Korea’s trade balance to tumble to USD 0.7bn: DBS

WIll these negative factors prevail in 2013?

According to DBS, Korea’s trade balance in January (due Fri) will show a sharp decline to USD 0.7bn. Korea’s current account registered USD 2.3bn in Dec12, a smaller surplus compared to USD 6.9bn in Nov12. This was mainly attributed to the narrowing of trade surplus in Dec12, as exports were negatively impacted by the working day effects.

Here’s more:

The seasonally adjusted industrial production reported a stronger-than-expected rise of 1.0% MoM in Dec12, which corroborates our view that the YoY weakness in December exports and production resulted from seasonal factors.

The current account will likely remain weak temporarily in 1Q13. Custom trade datawill be distorted by the Lunar New Year effects in January/February. Don’t be surprised that trade balance in January (due Fri) will show a sharp decline to USD 0.7bn.

Meanwhile, the income account will fall into deficit in March/April, due to dividend payments to overseas investors in the end of fiscal year. That said, all these negative seasonal factors will dissipate starting from 2Q13.

For the full year of 2013, we expect a strong current account surplus of USD 30bn, slightly smaller than USD 43bn in 2012. As a percentage of nominal GDP, the current account surplus is expected to remain in line with the 10-year average of 2.3%. 

A strong current account will provide fundamental support to the KRW. Note that the financial account actually stayed in large deficit in Dec12 (-USD 6.5bn), primarily because of the reduction in foreign borrowings. In the whole year of 2012, the financial account recorded a deficit of USD 35bn, with USD 15bn outflows stemming from the fall in short-term foreign borrowings.

This further strengthens the view that the won’s appreciation since 2H12 was driven by fundamentals, rather than carry trades and speculative capital inflows.