Short-term Debt
The ratio of short-term foreign debts maturing within one year hit a one-year high. It is pointed out that short-term liability management should be shored up, as the international financial volatility is likely to increase with the Fed’s tapering coming to an end in October.
According to the tentative International Investment Position (IIP) for June announced by the Bank of Korea on August 20, the country’s total foreign liabilities increased by US$16.8 billion from the previous quarter to US$442.2 billion as of the end of June. US$131.8 billion of it was short-term debts, increased by US$8 billion during the same period. The ratio reached 29.8 percent, the highest since June last year.
The central bank explained that the increase in the ratio was because commercial banks borrowed more foreign currency than before. “Koreans’ overseas investment went up along with the demand for foreign currency funds, which resulted in more short-term borrowings,” it said, adding, “Still, the level is nothing to be worried about yet in view of those during the past financial crises.” The ratios had been 36.1 percent and 52 percent in the last quarter of 1997 and the third quarter of 2008, respectively.
Economists predict that the increasing short-term debts could be poisonous once discussions on interest rate hikes kick off from October to jolt the international financial market. Although Korea is recording the highest current account surplus and foreign exchange reserves ever in history, the fact that it has already experienced a financial crisis is not to be ignored.
“Until recently, foreign funds flowed out at a slower pace from Korea for its low foreign liability ratio,” said Oh Jung-kun, head of the Asia Finance Society. He continued, “However, the current situation is not desirable, with global financial stability sure to deteriorate next year.” The Ministry of Strategy & Finance said in response that it is monitoring various factors in the foreign currency market, bond market, and other places.