Impact of IMF EBA model revision on Korea's current account assessment

Current account gap expected to widen significantly

Export earnings seen as outsized relative to economic scale

Bank of Korea cites limits in capturing rapid aging, semiconductor boom

Export and import cargo stacked at Sinseondae Pier in Busan Port. [Yonhap]
Export and import cargo stacked at Sinseondae Pier in Busan Port. [Yonhap]

South Korea's current account surplus could be judged excessively large relative to its appropriate level in next year's IMF assessment, according to a new Bank of Korea report. The central bank said it plans to explain to the IMF the country's unique circumstances, including its rapidly aging population and the semiconductor boom.

Kim Min, a senior official at the Bank of Korea's International Finance Research Team, said in a report released Tuesday that South Korea's current account balance "could be assessed as substantially exceeding the appropriate level estimated by the IMF" in next year's evaluation. The report examined how revisions to the IMF's External Balance Assessment model affect South Korea's current account standing.

The IMF publishes an External Sector Report each year, evaluating member countries' current account balances as a share of GDP and estimating an appropriate current account level consistent with each country's medium-term equilibrium — a calculation that yields the current account gap, or the excess over that norm.

In this year's assessment, South Korea was judged to be running a surplus above its medium-term equilibrium level — a two-notch upgrade from the previous rating of "broadly in line." Kim said South Korea's rapidly growing elderly population worked against the country in the current account evaluation.

A high current account gap can be interpreted as a sign that a country is earning more from exports than its economic size and structure would warrant.

South Korea's current account gap rose 2.3 percentage points compared with 2024, with roughly 60 percent of that increase attributable to a decline in the estimated appropriate current account level, about 1.4 percentage points. Of that, 1.1 percentage points stemmed from revisions to the demographic component of the model.

In the model introduced for this year's assessment, the IMF changed the denominator used to calculate the population share from the working-age population to the total population, and replaced the projected share of the elderly with the current share. South Korea was found to have been the most affected of the 26 countries analyzed by the model revision.

Kim further projected that if the concept of "excess-adjusted net foreign assets" is incorporated into next year's assessment, it would push down the estimated appropriate current account level for South Korea, working against the country's rating.

Excess-adjusted net foreign assets refer to a country's actual net foreign assets minus the accumulated excess current account balances — both surpluses and deficits — over a given past period. Because South Korea is a net foreign creditor, with external assets exceeding external liabilities, and has accumulated periods of positive current account gaps in the past, the revision would widen its current account gap.

Projections of South Korea's current account gap for 2026 under three scenarios — with the current account at 3.3 percent of GDP (optimistic), 2.0 percent (baseline) and 1.6 percent (pessimistic) — showed that in all three cases the model revision would reduce the appropriate current account level by 1.1 percentage points, reflecting a 0.74-percentage-point impact from the model change.

The resulting current account gaps would be 2.11 percent (optimistic), 1.78 percent (baseline) and 1.38 percent (pessimistic), Kim said. Under all three scenarios, South Korea would "substantially exceed" the IMF's estimated appropriate level, making a further one-notch upgrade to its rating highly likely.

The Bank of Korea said the EBA model "has limitations in capturing South Korea's unique characteristics, such as its rapid aging and the semiconductor boom," and added that it would explain to the IMF factors including uncertainty over whether the sharp rise in the current account surplus reflects a long-term structural trend or a cyclical phenomenon.


kimstar@heraldcorp.com