They include compensation of employees, investment income, and other primary income.In 2023, Korea had a current account surplus of 29.8 billion USD, which means that it earned more from
Trang 1MINISTRY OF EDUCATION AND TRAININGUNIVERSITY OF ECONOMICS HO CHI MINH CITY
FACULTY OF FINANCE AND BANKING
THE CURRENT ACCOUNT AND EXCHANGE RATE IN 2023 FOR SOUTH KOREA
Subject: International FinanceLecturer: Lê Thị Hồng MinhClass Code: 24D1FIN50504402Practice group: Group 8
Class: FNC02
Ho Chi Minh City, February 25th, 2024
Trang 2 II: Exchange Rate
2.1.1: Inflation Differential and 2.2.1: Interest Rate Differential.
II: Exchange Rate
2.1.3: Government Trade Restrictions and 2.2.2: Exchange Rate Expectations.
3Lâm Khải Anh Thư31221020310
Research, editing, formatting, and writing
Trang 3TABLE OF CONTENTS
I CURRENT ACCOUNT: 1
1 The Reality in 2023 2 Components
2.1 Payment for Goods and Services 2.2 Primary Income Payments
Trang 4I CURRENT ACCOUNT:1 The Reality in 2023
According to the Bank of Korea (BoK), the current balance for the whole year 2023 reaches 35.49 billion USD Specifically, the country's current balance recorded a deficit for 2 consecutive months in January (4.21 billion USD) and February (520 million USD) but achieved a fairly stable surplus in January 3 The total current account deficit in the first quarter of 2023 is 4.46 billion USD, down 19.34 billion USD compared to the first quarter of 2022 (surplus of 14.88 billion USD) Since March, South Korea's current balance has been in surplus until December 2023
2 Components
According to Nikkei Asia, South Korea will have a trade imbalance of 18 billion USD with China in 2023, its first bilateral deficit in 31 years Regarding export commodities, statistics collected in 2023 reveal that Korea's exports to China fell to 124.8 billion USD, a roughly 20% decline from 155.7 billion USD in 2022 Furthermore, imports from this adjacent nation in 2023 will be 142.8 billion USD, down approximately 8% from 154.5 billion USD in 2022 A steeper decrease in exports has resulted in a trade imbalance between Korea and China, the world's second-biggest economy, following a surplus of 1.2 billion USD the previous year
In contrast, South Korea's yearly exports to the United States climbed by 5% in 2023 For the first time in over 20 years, the value of Korean goods shipped to the United States exceeded that of China, owing to relatively consistent sales of cars, auto components, and vehicle batteries South Korea's increased exports to the United States are also consistent with President Yoon Suk Yeol's foreign strategy of strengthening relations with Washington
South Korea's total export products in 2023 were 632.7 billion USD, a 7% decrease from the previous year, as exports fell for the first time in three years Imports also declined by 12% to $642.7 billion.
The reduction in exports and importsresulted in a trade deficit of $10 billionfor the second year in a row, although a
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Trang 5The primary income payments of Korea are the payments made to foreign investors or workers for the use of their capital or labor They include compensation of employees, investment income, and other primary income.
In 2023, Korea had a current account surplus of 29.8 billion USD, which means that it earned more from its exports and income receipts than it spent on its imports and income payments This was lower than the surplus of 47.6 billion USD in 2022, indicating a decline in the current account balance.
One of the main factors that contributed to the decline in the current account balance was the increase in the primary income payments, which rose from 63.9 billion USD in 2022 to 72.4 billion USD in 2023 This means that Korea paid more to foreign investors or workers for their capital or labor in 2023 than in 2022
The increase in the primary income payments was mainly driven by the rise in the investment income payments which accounted for 90% of the total primary income payments in 2023 Investment income payments are the payments made to foreign investors for the returns on their investments in Korea, such as dividends, interest, and profits.
Besides, the rise in the investment income payments reflects the fact that Korea has a large net foreign liability position, which means that its foreign assets are smaller than its foreign liabilities In other words, Korea owes more to foreign investors than it owns from foreign investments This makes Korea vulnerable to changes in the global financial markets, exchange rates, and interest rates, which can affect the returns on its foreign assets and liabilities.
Therefore, the primary income payments affect the current account balance of Korea by reducing it The primary income payments are mainly determined by the investment income payments, which are influenced by the net foreign liability position of Korea A higher net foreign liability position means a higher investment income payment, which means a lower current account balance.
Trang 6The secondary income represents aid, grants, and gifts from one country to another Net secondary income represents the difference between the secondary income receipts and the secondary income payments
In 2023, South Korea's secondary income from January to December was negative This means
the secondary income received bySouth Korea was less than the secondary income payments sent by South Korea.
Although this component only accounts for a small proportion of the total current account, it still causes a deficit in South Korea's current account in 2023.
3 Determinants
South Korea, known for its rapid economic growth and scientific and technical innovation, has emerged as a worldwide commercial and outsourcing center As a result, the compensation structure and advantages of outsourcing in this dynamic country are critical for multinational enterprises Employee wages in Korea vary widely, with the average monthly salary being roughly 3,900,000 KRW Salaries fluctuate between 983,000 KRW (the lowest average) to 17,400,000 KRW (the highest
average; the actual maximum salary is greater) This distinction reflects the diverse job market and the differing demands of different occupations South Korea's minimum hourly pay for 2023 has been set at 9,620 won ($7.40), up 5% from 2022, according to an agreement reached between workers and company representatives The new minimum monthly pay for 2023 is 2,010,580 KRW, based on 209 working hours per month This minimum pay rate applies across all industries
Trang 73.1.1 By region
The average wage in Korea varies greatly by city Salaries in major cities like as Seoul and Busan are frequently higher due to the concentration of multinational corporations and the high cost of living
This figure highlights income differences between regions, with the capital Seoul offering higher salaries than other cities.
3.1.2 By industry
The occupations in Korea are very diverse so it also significantly affects their salary in Korea.
This figure shows the diversity of income potential across different industries, with industries such as Healthcare, Real Estate and Banking leading the way in terms of salaries.
CityAverage Monthly Salary (KRW)
Trang 83.1.3 By education
Education level plays an important role in determining salary in Korea In general,
higher educational attainment leads to higher income For example:
• Employees with a certificate or diploma earn 17% more than high school graduates • Those with a bachelor's degree receive 24% more than those with a graduate degree • People with a Master's degree tend to earn 29% more than those with a bachelor's degree • People with a doctorate earn 23% more than people with a master's degree.
Experience is another important factor in determining salary Entry-level positions
start at lower salaries, while professionals with more experience can command much higher salaries.
For example:
• Employees with 2-5 years of experience earn an average income about 32% higher than fresh graduates with no experience.
• Similarly, individuals with more than 5 years of experience earn 36% more than those with less experience.
• Employee salaries increase by 21% when employees have more than 10 years of experience • Professionals with 15 years of experience earn 14% more than those with less experience.
The International Monetary Fund has raised South Korea's inflation projection to 3.6% in 2023 and recommended that the government maintain current interest rate policy to guarantee price stability In the IMF's annual report released by the Ministry of Finance in November 2023, the IMF forecasted a 3.6% inflation rate for 2023, 0.2% higher than the 3.4% expected in the IMF's October report.
Trang 9In October 2023, the BOK kept its benchmark interest rate constant at 3.5%, which it has held since January 2023 It was the sixth consecutive freeze, but the highest since 2008 Meanwhile, the Korean government intends to undertake extensive steps to tackle inflation President Yoon Suk Yeol said: “Although the inflation rate in our country is relatively low compared to major countries, the cost of living as perceived by the public is still high and the burden is increasing due to persistently high-interest rates,” the 2024 budget speech at the National Assembly in Seoul on October 31
In its report, the IMF also stated that beginning this year, it will only evaluate South Korea's foreign exchange reserves using qualitative indicators, as it does for other advanced nations So far, it has included qualitative and quantitative features Regarding the quality aspect, the group stated that Korea now has sufficient foreign exchange reserves to absorb external shocks From a longer-term perspective, foreign groups argue that Korea should pursue structural changes such as increasing labor market flexibility, eliminating gender imbalance in the labor market, and reforming the pension system.
Based on facts regarding inflation in Korea in 2023, we can conclude that an increase in Korea's inflation rate in the last months of 2023 would result in higher prices for both
exported and domestic items This causes a fall in exports and a rise in imports, resultingin an increase in South Korea's current account at the end of 2023.
According to the data from CEIC, South Korea’s gross national product (GNP) was $425.715 billion in June 2023, up from $424.386 billion in March 2023 This means that South Korea’s total income earned by its citizens and businesses increased slightly in the beginning of the second quarter of 2023.
In the third quarter, South Korea’s GNP increased to 481530.20 KRW Billion from 471513.60 KRW Billion in the second quarter of 2023.
However, this was lower than the record high of $494.368 billion in the fourth quarter of 2021 This means that South Korea’s national income decreased by 13.9% in one and a half years
Trang 10One possible reason for this decline is the impact of the COVID-19 pandemic and the trade tensions with Japan and China on the country’s exports and tourism sectors Assuming that the national saving rate (the ratio of national saving to national income) remained constant, this implies that national saving also decreased proportionally.
On the other hand, national investment could have increased or decreased depending on the factors affecting the investment demand, such as the interest rate, the expected profitability, the tax policy, and the business confidence.
The effect of national income on the current account of Korea in 2023 depends on the relative changes in national saving and national investment Based on the data from CEIC, South Korea’s current account balance as a percentage of GDP was 1.8% in 2023, down from 4.7% in 2022 This suggests that national saving decreased more than national investment, or national investment increased more than national saving, resulting in a lower saving-investment balance and a lower current account surplus Therefore, the decline in national income in 2023 had a negative impact on the current account of Korea.
The credit condition of Korea in 2023 had a negative effect on its current account, as it reduced the national savings and increased the national investment According to the data from CEIC, in the last three months of 2023, the increase in household debt was lower than usual, because the real estate market was not weak because the borrowing costs were high At the end of the year, the total amount of household debt reached a new high of 1,886.4 trillion won ($1.41 trillion), which was only 0.4 percent or 8 trillion won more than the previous quarter This could have lowered the domestic savings and raised the demand for foreign goods and services, resulting in a lower current account surplus.
As widely predicted, the Bank of Korea did not change its base rate of 3.5% in its first meeting of the year This was the 8th time in a row that the borrowing costs stayed the same, despite low inflation, high household debts, and a local developer’s credit problems Investing in new assets requires borrowing money, which is more costly when the interest rate is high Because high interest rates could have discouraged domestic investment -the money that Korean businesses and households spend on buying or building new assets so they would better save their money in banks or other financial institutions This could reduce the demand for foreign goods and services, Korea would spend less money on other countries, which would improve the current account balance.
Trang 11On the contrary, the higher interest rate leads to the higher returns when foreign investors or MNCs spend on buying or lending to Korean assets (stocks, bonds, loans, ect) Which means the high interest rate could have encouraged foreign investment Foreigners could sell or withdraw their money from other countries and move it to Korea, which would increase the supply of foreign currency in Korea and make the Korean won appreciate, or increase in value, relative to other currencies Korean goods and services would become more expensive while foreign goods and services would become cheaper, so Korean people tend to buy more foreign goods and services, increasing the imports and decreasing the exports Alternatively, reduce the money that Korea earns from other countries and increase the money that Korea spends on other countries.
The high interest rate could have discouraged domestic investment and encouraged foreign investment, leading to a capital outflow and a lower current account balance.
President Yoon Suk-yeol's government pursues an economy with the private sector playing a leading role, rather than the Government directly intervening financially Therefore, in 2023, the Government will continue to maintain this policy, while simplifying regulations, reducing taxes, and providing financial support to create a favorable environment to promote economic activities in the private sector, thereby Stabilizing the market, restoring exports, increasing investment.
In addition, the Government is planning to relax many types of regulations to create a "soft landing" for the real estate market, which is forecast to shrink next year Some options that the Government will promote are loosening real estate taxes for owners of multiple houses and real estate transfer taxes, allowing mortgage loans of up to 30% of housing value, and restoring transfer taxes Short-term concessions are similar to those before 2020.
To support exports next year, the Government will pour 360,000 billion won (281.9 billion USD) in short-term loans to export businesses, raising the investment tax deduction level to 10% in case the business increases investment scale in 2023 In addition, the Government also proposed other plans to restore the people's economy such as lowering gasoline taxes, extending tax exemptions and reductions for agricultural, fishery and livestock products, and increasing the rate of investment Deduct income from items such as public transportation costs or interest on people's home mortgages.
According to the definition of exchange rate, if a country’s currency begins to rise in value against other currencies then its current account balance should decrease, other things being equal As the currency strengthens, goods exported by that country will become more expensive to the importing countries and thus the demand for such goods will decrease.