AI Investment Boosts Semiconductor Cycle, “Boom Expected Until Next Year”
– **International Oil Price Decline Reduces Imports, Expanding Current Account Surplus**
– **Structural Growth in Primary Income Surplus Contributes**
– **”Both Institutions and Individuals Earn Interest and Dividend Income from Abroad”**
This year, the Bank of Korea forecasts a current account surplus of $110 billion (approximately 152.8 trillion won). If achieved, this will surpass the previous record high of $105.12 billion in 2015. Major international investment banks (IBs) have also evaluated South Korea’s recent current account performance as “unbelievably good” and expect the positive trend to continue until the end of the year. Despite concerns about deteriorating exports, a major pillar of the South Korean economy, due to heightened U.S. tariff uncertainties throughout this year, how is such an optimistic outlook possible?
Powerful Semiconductor Cycle “Boom to Continue Until Next Year”
According to the Bank of Korea’s Economic Statistics System (ECOS), the cumulative current account surplus for January to July this year (provisional) stands at $60.15 billion, exceeding last year’s $49.21 billion by $10.94 billion (22.2%). The most significant factor has been the strong performance of the goods balance, which includes exports and imports of goods. The Bank of Korea’s revision of this year’s current account surplus forecast to $110 billion also mainly reflects an anticipated expansion of the goods balance surplus by $30.7 billion compared to last year.
Even with concerns about U.S. tariffs, semiconductors have been a strong support for South Korea’s exports. The thriving semiconductor industry, supported by the expanding demand for AI infrastructure, has driven a key segment of the country’s exports. Semiconductor exports from January to July reached $89.01 billion, up 14% year-on-year. In July alone, boosted by AI investment demand and pre-orders ahead of DDR4 phase-out, semiconductor exports increased by 30.6% year-on-year to reach $14.91 billion.
The Bank of Korea views the current expansion in semiconductor exports as potentially long-lasting, similar to the IT boom and proliferation in the early 2000s. As big techs continue to invest in AI servers, the AI ecosystem is expanding from big techs to general companies, and from companies to nations. Song Jae-chang, Director of the Financial Statistics Division at the Bank of Korea’s Economic Statistics Department, noted, “The continued demand for AI infrastructure will remain a core factor in the current account for the time being and is expected to persist into next year.”
International investment banks also cite South Korea’s robust semiconductor exports as pivotal for the current account surplus. Nomura Securities stated, “Supported by strong global AI demand and companies diversifying their export destinations, South Korea’s exports are expected to maintain solid recovery resilience.”
Decline in International Oil Prices Reduces Imports, Enlarge Current Account Surplus
The decline in energy prices also contributes to the enlargement of the current account surplus. The Bank of Korea, in its recent economic outlook, noted that the international oil price (Brent crude) has dropped from an average of $80 a barrel last year to $68 this year and is projected to fall further to $63 next year. ING highlighted that “Stable global raw material prices will expand South Korea’s goods surplus,” though it cautioned that declines in petroleum and petrochemical exports could limit this expansion.
However, the impact of U.S. tariffs is expected to progressively expand. In fact, the adverse effects on South Korea’s exports to the U.S. have been observed in sectors subject to tariffs, such as automobiles, auto parts, and steel, as seen in the July current account report. South Korea’s auto exports to the U.S. could face declining demand due to price increases from tariffs. Steel exports to the U.S. are also forecasted to be further impacted by already declining demand and price drops in the global construction and manufacturing sectors, exacerbated by the expansion of tariffed items.
Structural Expansion in Primary Income Surplus “Both Institutions and Individuals Earn Interest and Dividends from Abroad”
The structural growth of the primary income surplus has also bolstered the expansion of the current account surplus. Factors include an increase in outbound direct investments by Korean companies, as well as expanded overseas stock and bond investments by institutions and individual investors, leading to increased interest and dividend income from abroad. The primary income balance represents the difference in wages, salaries, and investment income between residents and non-residents.
The primary income surplus has risen sharply since the 2020s, growing from $13.49 billion in 2020 to $19.44 billion in 2021, $20.35 billion in 2022, and $26.25 billion in 2023, continuing to grow. As of July this year, it has reached $17.54 billion, reflecting years of companies steadily enlarging direct overseas investments and a surge in securities investments by agencies and individuals post-COVID-19. In Q2 this year, South Korea’s external financial assets saw a record increase of $165.1 billion as overseas direct and securities investments grew and the U.S. stock market showed strength.
Even accounting for fluctuations due to import and export performances, the primary income surplus’s share of the current account has increased from 17.8% in 2020 to 26.9% last year. Despite a strong goods surplus pushing the current account to a historic second-highest $99.04 billion, the primary income surplus’s share approached 30%. The market sees continued strong conditions for large-scale overseas investments by Korean nationals, including pensions, institutions, and individual investors.