Net External Financial Assets Decline for Second Consecutive Quarter Amid Strong Korean Stock Market

Expansion of U.S. Stock Investments Drives Record Surge in External Financial Assets
Overseas Direct and Securities Investments Expand Amid Strong U.S. Market
External Financial Liabilities See Second Largest Increase on Record
Domestic Stock Gains Outpace U.S.; Foreign Bond Purchases Accelerate

Net external financial assets (external financial assets minus external financial liabilities), which indicate South Korea's ability to meet external payment obligations, have decreased for two consecutive quarters. Although both assets and liabilities increased significantly due to rising stock prices at home and abroad, the increase in external financial liabilities-representing foreign investment in Korea-outpaced the increase in external financial assets, which reflect Koreans' overseas investments. This led to a decline in net external financial assets.

According to the "International Investment Position (Preliminary) for Q2 2025" released by the Bank of Korea on August 20, South Korea's net external financial assets at the end of the second quarter stood at $1.0304 trillion, down $53.6 billion from $1.084 trillion at the end of the previous quarter. This marks a decrease for the second straight quarter.

External financial assets saw a record increase of $165.1 billion, driven by expanded overseas direct investment and securities investment, as well as strong performance in the U.S. stock market. External financial liabilities, however, posted the second-largest increase on record at $218.6 billion, as domestic stock prices rose more sharply than U.S. stock prices and foreign investors increased their bond purchases. This increase in liabilities far exceeded the increase in assets.

Expansion of U.S. Stock Investments Leads to Record Increase in External Financial Assets

At the end of the second quarter, South Korea's external financial assets increased by $165.1 billion from the previous quarter, marking the largest increase on record. The total balance reached $2.6818 trillion, with a significant rise centered on residents' overseas securities investments ($113.2 billion).

Securities investment, primarily in equity securities, grew by $113.2 billion to reach $1.125 trillion. Equity securities increased by $95.6 billion to $844.6 billion, driven by the rise in U.S. stock prices and expanded overseas stock investments. Bond investments also continued to grow, increasing by $17.5 billion to $280.4 billion, amid expectations of U.S. interest rate cuts.

Direct investment stood at $804.8 billion at the end of the second quarter, up $26.4 billion from the previous quarter, mainly due to equity investments. Lim Inhyuk, head of the Overseas Investment Statistics Team at the Bank of Korea's Economic Statistics Department 1, explained, "Overseas equity investments in the automobile and secondary battery sectors continued, and the weaker U.S. dollar increased the dollar-converted value of direct investment assets denominated in other currencies. As a result, both transaction and non-transaction factors contributed positively."

Other investments, mainly by deposit-taking institutions, increased by $20.2 billion to $301.5 billion. Reserve assets, which represent the total foreign exchange reserves, increased by $500 million to $410.2 billion due to higher investment returns.

External Financial Liabilities Up $218.6 Billion... Second Largest Increase on Record

At the end of the second quarter, external financial liabilities stood at $1.6514 trillion, up $218.6 billion from the previous quarter. This is the second-largest increase since the fourth quarter of 2020 ($240.3 billion).

Non-residents' securities investments increased by $186 billion to $1.051 trillion, surpassing the $1 trillion mark. Lim noted, "For equity securities, foreign investors were net sellers of Korean stocks in the second quarter, resulting in a slightly negative transaction factor. However, the sharp rise in domestic stock prices greatly expanded the non-transaction factor." Due to the rise in domestic stock prices, equity securities expanded by $147.7 billion to $620.4 billion. Bond-type securities also increased by $38.3 billion to $430.6 billion, as foreign investment in long-term bonds expanded.

The balance of foreign direct investment increased by $26.1 billion, mainly in equity investments, reaching $317.2 billion. This was due to the appreciation of the Korean won, which increased the U.S. dollar-converted value of won-denominated liabilities, thereby expanding the non-transaction factor. Other investments, mainly by deposit-taking institutions, also rose by $11.7 billion to $241.5 billion.

Lim explained, "From the perspective of transaction factors, which are closely related to the medium- to long-term trend of net external financial assets, continued overseas direct investment and securities investment have kept net external financial assets above $1 trillion for three consecutive quarters since Q4 2024." He added, "While transaction factors such as increased overseas direct investment and securities investment have boosted net external financial assets, when non-transaction factors are also considered, the difference in domestic and international stock price growth rates and other non-transaction valuation effects have caused the increase in liabilities to exceed the increase in assets, resulting in a decrease in the net external financial asset balance."

Both external debt soundness and external payment capacity are assessed as favorable. The ratio of short-term external debt to reserve assets, an indicator of external debt soundness, rose by 4.3 percentage points to 40.7% from 36.5% at the end of the previous quarter. The share of short-term external debt in total external liabilities, which indicates external payment capacity, also increased by 0.9 percentage points to 22.7% from 21.9% at the end of the previous quarter.

Lim stated, "This is due to the expansion of foreign investors' short-term bond investments," adding, "Considering that both indicators are within their recent fluctuation ranges, we assess that both external debt soundness and external payment capacity remain favorable."