Net International Investment Position
The Net International Investment Position (NIIP) as a percentage of Gross Domestic Product (GDP), which indicates Korea’s ability to make international payments, stood at 46.3 percent last year, showing an increase of nearly 10 percentage points in just one year. This growth was driven by the expansion of domestic residents’ overseas direct investments.
According to the IMF’s annual External Sector Report (ESR) released on July 23, South Korea’s net international financial assets, excluding external financial liabilities, amounted to 46.3 percent of GDP based on last year’s data. This marks a significant increase of 9.9 percentage points compared to 2021 when net international financial assets accounted for 36.4 percent of GDP. The IMF attributed this growth to factors such as the rise in Koreans’ overseas direct investments.
Based on the report, South Korea ranked 9th out of 29 countries in the ratio of net international financial assets to last year’s GDP. Hong Kong topped the list with 486.0 percent, followed by Singapore with 176.1 percent, Switzerland with 93.3 percent, Japan with 75.2 percent, the Netherlands with 75.1 percent, Germany with 71.0 percent, Saudi Arabia with 61.5 percent, and Belgium with 54.0 percent.
According to the preliminary International Investment Position released by the Bank of Korea (BOK) on May 24, South Korea’s net international financial assets reached US$771.3 billion (989.9 trillion won) at the end of last year. In the first quarter of this year, it recorded an increase of US$1.7 billion, amounting to US$773 billion.
The IMF predicts that South Korea’s net international financial assets may reach around 56 percent of GDP in the medium term, which is 10 percentage points higher than last year. This projection is influenced by factors like the surplus in the current account. Furthermore, considering that around 60 percent of the external assets are dollar denominated, there could be a potential increase in external investment positions if the value of the Korean won depreciates.
The trend of rising net international financial assets relative to GDP is closely related to the recent surplus in primary income accounts. The cumulative surplus in the primary income account reached US$14.64 billion as of May, contributing to an improvement in the current account balance. An official from the BOK said, “Among advanced countries, there are very few that consistently maintain a significant trade surplus. While it may be premature to say that South Korea has firmly established a structure where the rise in overseas direct investments leads to growth in the primary income account, it is certainly moving in that direction.”
The IMF revealed that South Korea’s current account surplus amounted to 1.8% of GDP last year, influenced by factors such as a sluggish semiconductor industry, increasing prices of imported raw materials, and a decline in exports. The figure is 2.9 percentage points lower than the 4.7 percent recorded in 2021. However, there is a forecast of a recovery to 2.2 percent of GDP for this year and an expected increase to 3.5 percent in the medium term. Nevertheless, geopolitical tensions were highlighted as a potential variable that could adversely affect trade and investment.
South Korea’s net capital outflow last year reached 4.0 percent of GDP, which was higher than the 3.5 percent recorded in 2021. The capital outflow reflects the external investments made by domestic residents, a surplus in the current account, and the rise in net international financial assets, leading the IMF to assess it as a sustainable medium-term trend.
The IMF said, “The ongoing fiscal consolidation and tightening monetary policy in South Korea since mid-2021 will limit the expansion of domestic demand and imports. However, this trend is expected to provide short-term support to South Korea’s external position.” It also added, “In the medium term, an increase in precautionary savings due to an aging population, reduction in household debt, and strong policies to mitigate risks related to geopolitical tensions would help maintain a sound external position.”