subject international finance topic analyze the determinants of the current account and exchange rate in south korea 2023

UNIVERSITY OF ECONOMICS HO CHI MINH CITY COLLEGE OF BUSINESS FACULTY OF FINANCE [IITIII UNIVERSITY SUBJECT: INTERNATIONAL FINANCE TOPIC: ANALYZE THE DETERMINANTS OF THE CURRENT ACCO

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY

COLLEGE OF BUSINESS FACULTY OF FINANCE

[IITIII

UNIVERSITY SUBJECT: INTERNATIONAL FINANCE

TOPIC:

ANALYZE THE DETERMINANTS OF THE CURRENT ACCOUNT

AND EXCHANGE RATE IN SOUTH KOREA 2023

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY

COLLEGE OF BUSINESS FACULTY OF FINANCE QOO00

UEH

UNIVERSITY SUBJECT: INTERNATIONAL FINANCE

Lecturers : Le Thi Hong Minh

Students : Vụ Thi Thanh An = — 31221025726

Phan Truc Anh — 31221022467

Le Nguyen Gia Han — 31221022191 Dao Phuong Ngan -— 31221020742

Course code : 24D1FIN50504006

Class : FNCO9

Batch : K48

Ho Chi Minh City, May 6", 2024

Table of Content

1 General economic situation of Korea im 202 ch TH HH T101 H HH HH rey 3

Pa g.o nh 3

na nan ố 3

2.2 Componenis oƒ the KOF€đH CHITEHÍ QCCOHHÍ su HH TH HH HH HH, 3 2.3 G 02/2/12 nan ốốốốố.ố ốe 4

Ki yậÀ 6

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3.3 Exchange rates between South Korea and the 2 largest Irading DaFIHEFS 7

4, Impact of exchange rates On CA ccecccesecssesscesecsseeseesceeseessessecsssseesecseseseeseenssssseseesnees ones 9 5 South Korea and Vietnam 10

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List of Abbreviations

Abbreviasion Definition

US United States of America

UK United Kingdom HCMC Ho Chi Minh City KRW The South Korean won USD The United States dollar CNY The Chinese yuan renminbi VND The Vietnamese dong MNC A multinational corporation KERI Korean Institute for Economic

Research BoK Bank of Korea KITA Korea International Trade

Association FDI Foreign Direct Investment LNG Liquefied Natural Gas KOSPI Korea Composite Stock Price Index VKFTA VietnamfiKorea Free Trade

Agreement

RCEP Regional Comprehensive Economic

Partnership

1 General economic situation of Korea in 2023

South Korea ranks 24 among 16 economies in Southeast Asia, East Asia, Oceania, and 10"

among 50 high-income economies The Korean economy in 2023 has slowing growth characteristics This slowdown is mainly due to falling exports, especially in the

semiconductor industry In the first half of 2023, South Korea’s economic growth reached

1.1% and the second half of the year was 2.4% According to a report by the Korean Institute for Economic Research (KERI), South Korea’s economic growth rate in 2023 is expected to

be only 1.3%, which is the lowest growth rate ever if it does not count crisis periods such as the financial crisis and the Covid-19 pandemic

Overall, 2023 is a challenging year for the Korean economy There are many factors that affect the economic growth of Korea Of which two factors that have an important impact on economic growth are current account and exchange rates Current account, part of the balance

of payment, recognizes short-term financial transactions between a country and the world A positive current account can indicate that there are many foreigners investing in the economy, which can generate growth Conversely, a negative current account may indicate that foreign investors are withdrawing capital, which may slow growth Exchange rates can also affect the rate of economic growth A strong exchange rate can lower the value of exports, which can reduce the growth rate Conversely, a weak exchange rate can increase the value of exports, which can generate growth Therefore, understanding these factors and how they affect the economy 1s important when assessing the economic growth rate of Korea

2 Current Account

2.1 Concept

The current account measures the flow of funds between one country and all other countries due to purchases of goods and services or to income generated by assets The main components of the current account reflect international transactions between the two countries for goods and services, primary income (transactions with MNCs and foreign investors), and secondary income (funding, aid, gifts, etc from other countries)

2.2 Components of the Korean current account

Specifically, the components of the current account presented in the Korean financial report

include: exchanges of goods (exports, imports), services (production services, transportation, travel, etc.), primary income (compensation of employees, foreign investment), secondary

income, and some specific components presented in the figure below:

(Millions of U.S, dollars}

| Curent Acrount 427 | 24M9 | 818 | 49 60727 oT | Ate

1 Goods e125 | (ĐÔ | 3983 | A15 | S24 | 7483 68M2 - ĐI

“1 Byars Ì 8081 | | saeeno | 561025 | s777eg | 588884 | S/MB9 +2 impor (F08) Tig aes | 486162 | soaee | 49812 | 8@85

2 Serves | 4805 | 4480 | 498 | 4895 | 38899 | 42788 | 22109 - 2884

2.1 Menutacuing Senices sua | 64 | 404 | 382 | 388 | #22 | 5085 | 200

22 Transpo 3M | B1 | 438M 11 | 334 | m7 | 30 | 381 | 38M 231na8 mio | 4M4 | T65 | 468 | 41 | 48 | 42M6 | 4402

24 Construction Senices MA | M5 | E5 | 3093 | 3068 | 41 | ZHA | 3050 | 341 | S018

2.5 Use of Intellectual Property | 951.5 26 ABS 1908 78 A088 | 3446 37.0 489.1 894

2.6 Other Business Services 803.1 887.4 40 5165 -309.6 10714 9659 -208.2 12595 4461

3 Primary Income 6,669.5 25032 30803 1425 47192 | 52585 | 338883 | 18790 2,180.4 3385

3.4 Compensation of Employees) -169.0 16 1235 43 165.0 233.3 196.3 0 1435 23.2

3 inesinent come WMBS 28M 383 | 46? | (#M2 | Suote | 3866 | (HẦU | 2389 | 38WU

income on Equyy | 5868 1783 | 26736 | 44A | soit | gents | 0899 | B9 | (I2 | 22A 1 4UI 20

{Income on Debt} 8615 | 630.2 556.2 | 693.1 | 864.2 | 569.7 999.4 | 603.7 | 957.3 T90 9 3843

4 Secondary Income 166.8 315.6 3%2 -T1T -394.4 -356.6 -1,097.8 | -118.2 -384.1 142 660.0 546.9

2.3

(Source: Bank of Korea)

Korean current account

In 2023, South Korea’s current account has significant volatility in balance:

In January, a record deficit of $4,204.8 million, a sharp decrease from December

2022 ($2,860 million) according to Bok, was the largest monthly current account deficit since January 1980 Due to the reversal of the balance of exports and imports - exports fall and lower than imports At this time, major countries like the United States, the UK, etc continually tighten monetary policy by raising interest rates to curb escalating inflation This leads to a decrease in import demand of some South Korean import-export partners Statistics of the Korea International Trade Association - KITA (2023) indicate that South Korean goods exports to the

four largest import partners: China, the US, Vietnam, Japan, fell 31.1%, -6%,

29% and 12.3% Especially the reduction in the number of exports to China, South Korea’s largest trading partner, resulting in South Korea’s first trade deficit

with China in 31 years At the same time, this is the month recorded with the

highest “primary market” income of the year, the balance recorded at $6,669.5

million, of which the income from South Korea’s “investment” amounts to about

$6,838.5 million Showing that in January 2023, South Korean MNCs and Korean

investors actively invested FDI in other countries such as the US, China, Vietnam,

etc., grossing $6,838.5 million in dividends, interest, investment in fixed assets,

and some other forms of investment This is the month recorded a record deficit in South Korea’s current account balance due to the volatility too large in the

“export” and “import” balances of the year

In the first 3 months of the year, South Korea’s “import” balance was recorded at

a high of $55,478.5; $51,913.2; $57,763.6 million resulted in the current account

balance of South Korea’s deficit for the first quarter of the year According to the East Asia Forum, although South Korean imports fell 12% from the previous year, South Korea’s trade balance still recorded deficits for two consecutive years

for two main reasons: high energy costs and trade issues with China In terms of energy costs, although South Korea’s energy imports fell by 22% in 2023, the cost of importing crude oil, liquid natural gas (LNG), coal, and other oil products remained above the level before Russia invaded Ukraine Geopolitical concerns have caused costs to rise, including a surge in prices at the beginning of the Israel-

Hamas war

¢ October and December had the highest current account balance of the year, with

$7,437.8 million and $7,414.6 million respectively Thanks to the increase in the amount of export goods, especially the increase in semiconductor and automobile exports The most prominent was in December, South Korea achieved an impressive balance in the “export” category: $59,003.9 million Of which, semiconductor increased by 19.1%, passenger vehicles increased by 19.2% and ships by 44.4% By region, exports to the United States increased by 20.7%, to Southeast Asia increased by 15.4% and to Japan by 2.5%, but exports to China fell by 3.0% (Business Korea Magazine, 2024) Starting in October 2023 also marked the slow return of South Korean exports after a year of decline Thanks to this, South Korea’s current account balance in December reached the highest surplus in 2023

Overall, the biggest impact on South Korea’s current account is the balance of import and export “Goods” “Export” and “Import” are the two items with the largest trading balance recorded in the current account The export balance is smaller than the Korean import balance amid the large countries of the world who have increased interest rates to curb inflation, rising energy prices, trade relations with China have led to the current account balance of South Korea regularly recorded negative levels throughout the first four months of 2023

“Primary income” is the second largest component of South Korea’s current account "The

most prominent of which is the income from dividends, interest, fixed asset investment,

expressed in "Invest income" “Primary income” in 2023 has a large volatility balance with

the largest recorded balance of $6,669.5 million and the lowest balance of $742.5 million It

shows that South Korea’s primary income source is not too stable Overall, South Korean investment income still reaches a profit of 11.6%, bringing total assets to $189.4 billion according to the Korea Investment Corp annual report 2023 Thanks to the strong growth of traditional assets, which accounted for 78% of total assets Equity has a profit margin of 22.4%, while fixed income has a profit margin of 6.3% Alternatives with annual profitability for 5 years are 8.6% Private equity is superior to other asset classes with a profit margin of 13.5%, etc This is also a bright spot in South Korea’s efforts to improve investment after 2022, when the company reported an annual return of -14.36% - the worst loss since 2008

The “Service” balance is the lowest balance of the South Korea current account in 2023 Specifically, the balance of services of South Korea has a balance ranging from -3,357.8 million USD to -907.6 million USD throughout 2023 In this category, the "Travel" account balance ranges from -1,478.9 million to -440.4 million is the main factor that constitutes the deficit of the Korean service balance 2023 The slow recovery of tourists arriving in Korea following the COVID-19 pandemic with the amount of spending by Koreans on foreign tourism, a quick recovery is thought to be the leading reason for this deficit The slow recovery rate of the Chinese market — which is South Korea’s leading market, is also a factor that exacerbates the tourism balance deficit Since the outbreak, Beijing has stopped licensing

for delegation tours to South Korea The number of Chinese tourists also reached only 546,000 in the first 6 months of 2023, equal to 19.5% compared to the same period in 2019

On the other hand, the number of Koreans traveling abroad is 9.93 million, recovering by 66% compared to the first half of 2019 The travel spending in the first half of 2023 reached

$11.56 billion, far exceeding $6.91 billion

In summary, in 2023, South Korea’s current account has a large balance ($4,204.8 million to

$7,437.8 million) The major volatility in South Korea’s current account balance comes from the international trade balance Especially in the first quarter of 2023, due to the global

situation pushing up interest rates to curb inflation and a decline in trade between China and South Korea and several other events that have reduced exports and increased South Korean imports, leading to a reversal of the Korean trade balance and creating a record deficit for

current accounts in 2023 In addition to the trade balance, "Primary income" is considered the

second most influential component of South Korea's current account South Korea’s “Primary income” is also noted for its large and unstable fluctuating balance in 2023 However, the

overall investment situation of Korean corporations still recorded 11.6% growth in the year This is a testament to the success of the efforts to revive after the severe investment loss

recorded in 2022 by South Korean MNCs Finally, the “Service” balance of services — the

composition with the highest deficit in the entire year 2023 in the current account of Korea

2023 This deficit shows that South Korea’s tourism and production services during the year were not too positive Due to the number of visitors to South Korea has yet to recover well

accompanied by the loss of tourists from China - Korea's top market has caused the "Travel" balance deficit

3 Exchange rate

3.1 Concept

The exchange rate (also known as the exchange rate of foreign currency, the exchange rate of Forex) between the two currencies is the exchange rate at which one currency will be exchanged for another currency It is also considered the price of a country’s currency expressed by another currency

3.2 Elements of influence

The exchange rate 1s a comparison of the value of one country’s currency compared to the other country’s currency Therefore, there are many factors that affect the value of the country’s currency, here are the five main influencers:

¢ Inflation Inflation inverse rates with exchange rates

Keep other factors in the constant economy, the higher or higher that country’s inflation than

other countries, the lower the exchange rate, the devaluation of the local currency and the

purchasing power of the local currency will decrease compared to the foreign currency

© Interest

Similar to inflation, interest rates and exchange rates also have a close relationship with each other The hypothesis states that capital will flow from low to high interest rates Therefore, when domestic interest rates rise, more foreign capital and foreign currency sources will come in The currency to local currency exchange rate declines as a result

6

¢ Balance of payment

The demand for the foreign currency will rise, resulting in an increase in the exchange rate, when the balance of payments indicates signals of overspending On the other hand, demand for local currency rises and foreign currency falls when the balance of bumper payments is made The exchange rate declines as a result

e Public debt

Public debt is the cause of the national budget deficit When encountered with a budget deficit, countries will tend to mobilize foreign funding through the form of debt This causes the foreign currency supply to increase and causes the currency’s exchange rate to fall

On the other hand, when the country suffers a large debt is also the cause of the inflation situation to rise Which inflation has a direct effect on the exchange rate

© Current account deficit

A current account is a country’s trade balance compared to that country’s trading partner The current account deficit proves that the country needs more foreign currencies than what it exports, while providing foreign currencies more than the actual purchase of goods This makes foreign currency demand excess, which becomes the cause of a decrease in exchange

rates

3.3 Exchange rates between South Korea and the 2 largest trading partners

South Korea’s total exports in 2023 were at $632.7 billion, down 7% from the previous year South Korean imports are also at a 12% drop to $642.7 billion compared to 2022

South Korea recorded a $10 billion trade deficit for the second time in a row, although it fell from $47.8 billion in 2022

South Korea’s biggest trading partner in 2023 was China, with a bilateral turnover of $267.66 billion The United States is South Korea’s second largest trading partner with $186.96 billion

e Exchange rates between the yuan (China) and the Won (Korea)

200

190

(source: Exchange-rates.org ) This graph displays CNY/KRW exchange rate history data for 2023

The lowest exchange rate between CNY/KRW on July 19, 2023:

1 CNY = 175.19 KRW

The highest exchange rate between CNY/KRW on March 1, 2023:

1 CNY = 194.25 KRW

South Korea recorded a $18 billion trade deficit with China in 2023, marking the first bilateral trade deficit with the country in 31 years

South Korean exports to China fell to $124.8 billion, down 20% from $155.7 billion in 2022,

while imports from the neighbor reached $142.8 billion, down 8% from $154.5 billion

In 2023, South Korean exports of goods to China fell to the lowest level in three decades amid growing competition between the US and China and Seoul’s strategic pivot According

to KITA, South Korea accounted for 6.3% of China’s imports in 2023, down from 7.4% in

2022 The reason is because China is increasing its self-reliance in key product production, technological development This is also due to some political tensions and supply chain disruption that have greatly affected South Korea's export position in this "giant" market

It can be seen that Samsung Electronics, the leader in smartphone sales in South Korea with 20% market share until 2013, has been dominated by previous Chinese rivals such as Huawei and Xiaomi, in addition to the Hyundai automotive group, which peaked at 7% in the 2000s, which is now almost dominated by market share Besides, China has also cut chip orders, which has led South Korean chip makers to suffer a prolonged decline in sales as chips are one of South Korea’s top exports to China (accounting for nearly 20% of exports between the two countries)

After China and South Korea formally established diplomatic relations in 1992, South Korea has always accounted for about 10% of the Chinese import market However, South Korea’s market share has declined in 2023, falling from 10.4% in 2016 to 6.3%, especially in key areas such as smartphones, screens, automobiles and petrochemicals Overall, the “giant” trade deficit with China due to exports of goods to this market dropped to the lowest level in the last three decades; this has led to a record drop in exchange rates between the two countries in 2023

e Exchange rates between the Dollar (America) and the Won (Korea)

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January March May July September November January

(Source: Exchange-rates.org )