The proportion of foreigners’ portfolio investment assets, such as stocks and bonds, in South Korea’s external debts is high, the Bank of Korea says, warning that an external impact could increase instability in the foreign exchange and stock markets.
The ratio of portfolio debts to South Korea’s external debts stood at 64.3 percent as of the end of 2017, according to a central bank's analysis of external position’s impact on the volatility in the foreign and stock markets, which was released on March 10.
The figure was higher than that of not only emerging countries, including Malaysia at 39.1 percent, Indonesia at 40.8 percent and Poland at 29.4 percent, but also advanced countries, such as the United States at 54.8 percent, Japan at 55.2 percent and Canada at 49.1 percent.
The report said that the volatility in the domestic foreign exchange and stock markets would increase from changes in external conditions when foreigners’ portfolio investment assets grow. The expansion of the size of the portfolio investments can be seen as a greater impact on domestic financial situations by global factors.
An official from the BOK said, “The size of foreign portfolio investments, which is directly affected by risk seeking behaviors, is excessively high compared to other countries.”
On the other hand, domestic portfolio investment assets failed to help reduce the volatility in exchange rates and stock prices. When a crisis breaks out, there is a coupling phenomenon which affect both domestic and foreign financial markets and it cannot absorb external shocks even by selling foreign investment assets. The fact must be considered in the process of securing foreign-exchange liquidity, according to an official from the BOK.