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South Korea’s Short-term Debt Ratio Continuing to Rise
CDS Premium Remains Low
South Korea’s Short-term Debt Ratio Continuing to Rise
  • By Jung Suk-yee
  • August 22, 2019, 11:59
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South Korea’s short-term debt ratio hit a 57-month high at the end of June this year.

South Korea’s short-term external debt-to-foreign exchange reserves ratio hit a 57-month high at the end of June this year.

The Bank of Korea and the Ministry of Economy and Finance announced on Aug. 21 that the ratio rose 2.8 percentage points in three months and reached 34.7 percent at the end of the second quarter. This level is the highest since September 2014, when the ratio amounted to 34.9 percent. Besides, its short-term external debt-to-total external debt ratio rose 0.9 percentage points to 30.3 percent, the highest since the fourth quarter of 2012.

The risk of the rising debt ratios lies in the possibility that its resources for external payment can become insufficient at a rapid pace. In addition, the rising ratios are adding to the burden on the forex supply side with South Korea’s monthly exports having fallen for nine months in a row and its half-yearly current account surplus at a seven-year low.

A lot of experts are pointing out the risk in that the IMF bailout in 1997 was related to short-term external debt maturities. “Debts of this type are particularly risky as maturity extension may be impossible,” said Seoul National University professor Kim So-young. “The ratio fell to 27 percent after the 2008 global financial crisis and the current rate of increase is somewhat excessive,” said Yonsei University professor Kim Jung-shik, adding, “The ratio should be lowered to 30 percent or less with bond investments by foreigners forecast to increase.”

The Bank of Korea, in the meantime, mentioned that the potential risks can be handled well enough, adding, “South Korea has enhanced its impact resistance such as forex reserves level since the 1997 foreign exchange crisis and the 2008 global financial crisis and its credit default swap premium is currently at the lowest level.” South Korea’s forex reserves totaled US$403.1 billion, the ninth-largest in the world, at the end of last month.

In fact, the short-term external debt-to-foreign exchange reserves ratio is very low in comparison to those during the crises that amounted to 657.9 percent and 79.3 percent, respectively. “The rise was because foreigners placed more demands for and made more investments in won-denominated bonds in the second quarter,” the ministry remarked, continuing, “Foreign bank branches’ increased borrowings from main offices are for domestic marketing activities and more investment in won-denominated bonds and are not directly related to South Korean banks’ soundness in terms of foreign exchange.”

According to the Bank of Korea, foreigners’ government bond investment balance in South Korea was US$86.6 billion in the second quarter, up US$6.2 billion from the previous quarter. Specifically, their short-term bond investment balance rose US$2.5 billion to US$12.7 billion and the short-term borrowings of foreign bank branches and so on increased US$4.1 billion to US$70.3 billion.