The International Monetary Fund (IMF) has assessed that South Korea's current account surplus exceeds an appropriate level, influenced significantly by a revision of its evaluation model, according to a study by the Bank of Korea. The revised model may have underestimated the appropriate surplus size due to its failure to adequately reflect the high savings tendency among the elderly and the rapid pace of aging.
In a BOK Issue Note titled 'Impact of IMF EBA Model Revision on South Korea's Current Account Assessment' released on October 6, the Bank of Korea reported that the IMF, in its external sector assessment report published in July, evaluated that South Korea's current account surplus last year 'exceeded' the medium-term equilibrium level. This marks an upgrade from the previous year's assessment of 'generally in line' and is the first upgrade since 2017.
The IMF estimates appropriate current account surpluses for countries using its External Balance Assessment (EBA) model, which considers various economic, demographic, and policy factors. The difference between the actual current account surplus, adjusted for economic fluctuations, and the estimated appropriate level is referred to as the current account gap. In surplus countries, a larger gap indicates a greater surplus beyond the appropriate level.
South Korea's current account surplus last year was 6.6% of its gross domestic product (GDP), an increase of 1.3 percentage points from the previous year. However, the model's estimated appropriate surplus decreased from 4.7% to 3.3%. Consequently, the current account gap widened from 0.8% to 3.1%. The IMF's final adjusted gap, considering South Korea's aging population, is 2.5%.
When analyzing the effects of the model revision while holding other conditions constant, the Bank of Korea found that the appropriate surplus for South Korea was lowered by 1.10 percentage points, the largest decline among 26 comparable countries. It was noted that 94% of the increase in the gap was attributed to an unexplained residual from the model.
The Bank of Korea pointed out that the savings and labor behavior of the elderly in South Korea differs from the model's assumptions. The model assumes that retired individuals reduce savings to increase consumption; however, last year, the average savings rate for households headed by individuals aged 65 and older was 32.2%, higher than the overall household average of 30.9%. The employment rate for those aged 65 and older was also 39.5%, the highest among OECD member countries. Additionally, 83% of the elderly's assets are in real estate and other physical assets, making consumption difficult.
Another factor hindering the model's ability to capture South Korea's rapid aging is the replacement of the future elderly population proportion with the current proportion. The proportion of the population aged 65 and older in South Korea is projected to rise by 4.9 percentage points from 2024 to 2029. Concerns over low public pension income replacement rates and fund depletion also incentivize the working generation to save more for retirement.
Next year, an additional model revision is planned to remove the accumulated excess current account surplus from net foreign assets. This is expected to further widen South Korea's current account gap by 0.74 percentage points. Considering the expanded surplus due to the semiconductor boom, all three scenarios used in the analysis indicated that the current account would 'significantly exceed' the equilibrium level.
Kim Min, head of the International Finance Research Team at the Bank of Korea, emphasized the need for communication with the IMF to consider the effects of the recent rise in semiconductor prices on the expanded surplus during future discussions. There have already been discussions among the Bank of Korea, the Ministry of Economy and Finance, and the IMF regarding this year's assessment, and the IMF adjusted the estimated appropriate current account surplus upward by 0.6 percentage points, taking into account South Korea's rapid aging.
Kim stated, 'The IMF's assessment has limitations in fully capturing the unique aspects of our country, such as rapid aging and the semiconductor boom,' adding that understanding the underlying factors for the widening current account gap is more important.
* This article has been translated by AI.
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