Liabilities Increased more than Assets
In the second quarter of this year, Korea’s net external financial assets (external financial assets minus external financial liabilities), which reflects the country’s external solvency, declined amid rising stock markets at home and abroad.
However, Korea’s ratio of short-term external debt to total external debt fell below 40 percent as financial institutions borrowed less from overseas. The nation made an improvement to its external debt soundness as its share of short-term external debt sank to the lowest point since the 1999 foreign exchange crisis.
According to a provisional second quarter international investment balance sheet released by the Bank of Korea (BOK) on Aug. 23, Korea’s external financial assets amounted to US$2.2251 trillion at the end of the second quarter, an increase of US$24.7 billion from US$2.2004 trillion at the end of the previous quarter.
Of the external financial assets, outward direct investment by Korean residents amounted to 658.1 billion won. It contracted by US$5.6 billion from the end of the first quarter.
Korea’s stock investments climbed by US$29.5 billion to US$806 billion. The increase was driven by rising global stock prices, including those in the United States. In fact, U.S. NASDAQ stock prices rose 12.8 percent and Japanese stock prices 18.4 percent during the second quarter. As a result, Korean individual and institutional investors enjoyed profits of US$20 billion in appreciation from their investments in foreign stocks and funds during the second quarter.
At the end of the second quarter, Korea’s external financial debt (foreign investment in Korea) stood at US$1.4611 trillion, up US$33.8 billion from the end of the previous quarter (US$1.4274 trillion). This was due to a US$900 million decrease in foreign direct investment in Korea and a US$48.6 billion increase in securities investment caused by rising Korean stock prices and an increase in foreign investment in debt securities during the period.
As Korea’s external financial liabilities increased more than its external financial assets, its net external financial assets stood at US$76.4 billion at the end of the second quarter, down by US$9 billion from US$773 billion at the end of the previous quarter.
Korea’s foreign credit stood at US$1.0189 trillion at the end of the quarter. The figure represented a decrease of US$2.3 billion from the end of the previous quarter. By sector, with a US$4.6 billion decrease in central bank reserves among others, the central bank and general government saw their foreign credit decline by US$4.7 billion and US$1.4 billion, respectively, while depository institutions posted an increase of US$4.9 billion in foreign credit.
Korea’s external debt stood at US$665.1 billion at the end of the second quarter of the year as it climbed by US$100 million during the second quarter. Its long-term external debt inflated by US$11.9 billion as the general government’s and the central bank’s debt securities ascended by US$13.6 billion and US$2.9 billion, respectively, while its short-term external debt dwindled by US$11.8 billion as depository institutions borrowed less (a drop of US$1.4 billion).
As Korea posted a bigger drop in foreign credit than in external debt, its net foreign credit hit US$353.8 billion, a drop of US$2.4 billion.
Korea’s ratio of short-term external debt to total external debt fell by 2.4 percentage points from the first quarter to 38.4 percent. It fell back below 40 percent as the denominator, reserve assets, shrank despite a larger reduction in short-term external debt.
The ratio of short-term external debt to total external debt hit 657.9 percent during the 1997 foreign currency crisis in Korea and touched 78.4 percent during the 2008 global financial crisis.
At the end of June, the share of short-term external debt sat at 24.3 percent, 1.8 percentage points lower than 26.1 percent at the end of March. It is the lowest in 24 years since the second quarter of 1999 (24.3 percent) shortly after the currency crisis.
The Korean government was also positive about Korea’s external debt. “Korea’s share of short-term external debt is at its lowest except during the foreign exchange crisis, when short-term borrowing was virtually impossible, and its ratio of short-term external debt to total external debt has fallen below 40 percent,” the Ministry of Strategy and Finance said. “Korea’s foreign currency liquidity coverage ratio (LCR), which indicates the ability of Korean banks to repay foreign debt, stood at 144.6 percent at the end of June, a way above the regulatory ratio of 80 percent.”
However, concerns are growing that Korea’s external soundness may deteriorate as recently, global economic uncertainties, including risks from China, have increased, and the volatility of Korea’s foreign exchange market has expanded.