Due to Stock Market Recovery, Q2 External Financial Assets and Liabilities Increase... Short-term External Debt Ratio Hits Lowest in 24 Years

Short-term External Debt Ratio at End of Q2 38.4%
"External Soundness Good but Need to Watch Chinese Economy and Foreign Exchange Market"

Due to the rising trend in domestic and international stock markets, both South Korea's external financial assets and liabilities increased in the second quarter of this year. However, liabilities grew more, resulting in a decrease in net external financial assets. The proportion of short-term external debt among external liabilities recorded its lowest level in 24 years.

According to the '2023 Q2 International Investment Position' released by the Bank of Korea on the 23rd, South Korea's net external financial assets stood at $764 billion at the end of the second quarter, down $9 billion from the previous quarter.

External financial assets increased by $24.7 billion to $2,225.1 billion, while external financial liabilities rose by $33.8 billion to $1,461.1 billion. External financial assets grew mainly due to residents' securities investments ($29.5 billion), and external financial liabilities increased primarily due to non-residents' securities investments ($48.6 billion). This reflects the recovery in domestic and international stock markets.

Net external claims, calculated by subtracting external liabilities from external claims, amounted to $353.8 billion, a decrease of $2.4 billion from the previous quarter. External claims decreased by $2.3 billion, while external liabilities increased by $0.1 billion.

External liabilities ($665.1 billion) saw a reduction in short-term external debt (-$11.8 billion), mainly due to borrowings by deposit-taking institutions, whereas long-term external debt increased by $11.9 billion, centered on debt securities issued by the general government.

Yoo Bok-geun, head of the Foreign Investment Statistics Team at the Bank of Korea's Economic Statistics Bureau, stated, "Short-term external debt sharply decreased in Q2 as borrowings by foreign bank branches and domestic banks declined. The borrowings by foreign bank branches had temporarily increased due to the Silicon Valley Bank and Credit Suisse incidents in March but were subsequently reversed, leading to a significant reduction. Domestic banks' short-term borrowings decreased due to the current account surplus turnaround in Q2 and increased foreign investment in domestic bonds."

Accordingly, the proportion of short-term external debt fell by 1.8 percentage points from the previous quarter to 24.3%, marking the lowest level since Q2 1999 (24.3%).

The 'short-term external debt ratio,' which is the ratio of short-term external debt to reserve assets indicating external payment capacity, dropped by 2.4 percentage points from the previous quarter to 38.4%. Despite a decrease in reserve assets (the denominator) by $4.6 billion, the numerator?short-term external debt?declined more significantly (-$11.8 billion), mainly due to short-term borrowings by deposit-taking institutions, leading to the overall decrease.

Yoo added, "Considering that South Korea's external payment capacity has improved and the maturity structure of external debt has lengthened, the country's external soundness is generally favorable. However, given the increasing uncertainties in the global economy, including China, it is necessary to closely monitor changes in domestic and external economic conditions and foreign exchange market situations."