Korea has experienced a long-lasting surplus in its current account since the Asian financial crisis in 1998. Recently the surplus has grown wider, with Korea recording a current account surplus of 7.7 percent of GDP in 2015 and 7.0 percent of GDP in 2016. We analyze the determinants of the current account and find that the current account balance is statistically significantly affected by demographic factors, net foreign asset, the relative GDP gap, oil price, fiscal balance and real exchange rate.
As of 2015, Koreas current account surplus is affected the most by the sharp drop in oil price in 2014 in the short run and demographic changes in the long run. Korea will have limitations in sustaining a large current account surplus as the working age population in Korea peaked in 2016 and will continue to decrease, and thus the contribution of demographic factors on the current account surplus in Korea will continue to weaken.
In the meanwhile, Korea keeps accumulating foreign assets from its persistent current account surplus. This can serve as an opportunity for the Korean economy as it will eventually lead to an increase in future primary income, and thus its current account surplus. Korea should be aware of the important role played by this accumulation of foreign assets.