Korea's current account surplus likely to reach USD 95bn in 2015

Korea's current account narrowed to USD10.1bn in July. The narrowing was due mainly to a smaller goods balance and a slightly smaller primary income surplus. These helped offset the deficit in the services account, which narrowed to USD1.9bn in July from USD2.5bn in June, as the other business services deficit narrowed. 

"With the YTD surplus standing at USD62.4bn and with five months left in the year, the current account surplus is expected to reach USD95bn in 2015 and USD84bn in 2016", says Barclays.

Meanwhile, it is evident that government efforts to recycle out the current account surplus more aggressively are steadily bearing fruit. For instance, the capital and financial account deficit (ex-reserves) increased significantly for a third straight month, widening to USD11.6bn in July from USD9.5bn in June. 

This was driven by a larger deficit of USD6.5bn in the portfolio investment account on the back of outflows from foreign investment portfolios. Other investment swung back to a deficit of bn from a surplus of USD2.2bn in June, due to increased overseas deposits by domestic financial institutions and repayment of borrowings abroad.

"All in, the sharp decline in August exports suggests that the goods surplus will shrink from here and that the weak KRW bias will intensify in the coming months. The BoK is now expected to deliver a further 25bp rate cut in Q4, most likely in October. A further rate cut is expected in Q4", forecasts Barclays. 

There is an outside chance of an earlier move at the 11 September meeting, but the BoK will prefer to move after the initial delivery of the fiscal supplementary spending and the US FOMC meeting on 17-18 September. 

"The first rate hike in Korea is expected in Q3 16, from late-Q1 16. Moreover, with key indicators for the services economy showing a healthy post-MERS rebound, the urgency to act immediately is still low. The existing focus on engineering a weaker KRW bias, possibly by stockpiling more essential commodities such as fuel, will remain", added Barclays.