With a short-term external debt ratio reaching a historically low level in the third quarter of this year, South Korea’s ability to meet external obligations is demonstrated by an increase of US$21.4 billion in net external financial assets in just one quarter. This is because debts decreased more substantially than assets due to non-trade factors such as the decline in global stock prices and the strengthening of the dollar. The outflow of US$6 billion in Iran’s oil export revenue also had a significant impact.
According to the “2023 3rd Quarter Preliminary International Investment Position” released by the Bank of Korea on Nov. 22, the net external financial assets, representing the difference between external financial assets and liabilities, reached US$785.4 billion as of the end of September, marking a gain of US$21.4 billion compared to the end of the previous quarter. This is the second-highest level ever, surpassing the third quarter of last year at US$810.7 billion. While external financial assets, representing domestic investment abroad, decreased by US$20.8 billion, external financial liabilities, reflecting foreign investment in South Korea, decreased even more by US$42.2 billion.
Specifically, external financial assets decreased by US$20.8 billion, totaling US$2.2 trillion. The Bank of Korea explained that this decline was mainly attributed to the global decline in stock prices and the depreciation of major currencies against the U.S. dollar. External financial liabilities recorded a decrease of US$42.2 billion, reaching US$1.42 trillion. This was influenced by non-trade factors such as the decline in domestic stock prices and the depreciation of the Korean won. Although both external financial assets and liabilities decreased, the situation exhibited an increase in net external financial assets, primarily driven by a more substantial reduction in liabilities. Since 2014, South Korea has consistently held the status of a net external financial asset country, exceeding domestic foreign investments, and has continued to maintain this position.
Foreign investment in the domestic market faced external impacts unrelated to transactions, such as the decline in domestic stock prices and the depreciation of the Korean won against the U.S. dollar. Upon closer examination of the actual reasons for the decrease, the majority, amounting to US$40 billion, can be attributed to non-transaction factors. The reduction in domestic investments abroad by locals also primarily originated from non-transaction factors, including the global decline in stock prices and the decrease in conversion amounts due to the strengthening U.S. dollar. With the current account surplus, however, the transaction factors increased by US$11.4 billion, partially offsetting the decrease in non-transaction factors of $32.3 billion, as explained by the Bank of Korea.
The overall external soundness is considered to be at a favorable level, according to the assessment by the Bank of Korea. As of the end of the third quarter, external debt stood at US$649.3 billion, reflecting a decrease of US$15.7 billion compared to the end of the previous quarter. When analyzed by maturity, short-term external debt experienced a significant drop of US$20.3 billion, with a notable decrease of US$7.9 billion in cash and deposits held by depositary institutions. This substantial decline was attributed to the conversion of the Korean won of frozen Iranian funds in South Korean banks into euros, leading to withdrawals.
As a result, the ratio of short-term external debt to total external debt, indicating South Korea’s external debt soundness, reached its lowest point since the compilation of statistics in the fourth quarter of 1994, decreasing by 2.5 percentage points from the end of the second quarter to 21.8 percent. The ratio of short-term external debt to reserves, or foreign exchange holdings, demonstrating short-term solvency, also dropped by 4.2 percentage points from the end of the previous quarter to 34.2 percent, recording the lowest level since the fourth quarter of 2019 right before the COVID-19 when it was at 33.1 percent. The ratio of short-term external debt, calculated as short-term external debt over total external debt, decreased by 2.5 percentage points to 21.8 percent.
Yu Bok-keun, the head of the overseas investment statistics team at the economic statistics division of the Bank of Korea, stated, “Considering the improvement in external payment capacity and the extended maturity structure of external debt, South Korea’s external soundness is judged to be favorable. However, given the significant global economic uncertainty, such as the situation in the Israel-Hamas conflict or the potential prolongation of the U.S. contractionary monetary policy, careful attention should be paid to both domestic and international macroeconomic situations and foreign exchange markets.”