Last Year's Short-Term External Debt Ratio at 35.5%, Highest in 8 Years... Bank of Korea Evaluates as "Stable"

Bank of Korea '2020 Year-End International Investment Position (Preliminary)'
South Korea's Overseas Debt Amounts to 542.4 Billion USD... Increased by 75.5 Billion USD in One Year

[Asia Economy Reporter Kim Eun-byeol] Last year, amid the COVID-19 pandemic, overseas bond issuance increased and foreign investment in Korean government bonds also rose, resulting in South Korea's external debt increasing by $75.5 billion to reach $542.4 billion. The short-term external debt ratio (35.5%) rose by 2.6 percentage points compared to the previous year, marking the highest level in eight years since 2012. Although indicators of external debt soundness slightly deteriorated, the Bank of Korea and the Ministry of Economy and Finance offered positive interpretations.

According to the '2020 Year-End International Investment Position (Preliminary)' released by the Bank of Korea on the 19th, South Korea's external debt at the end of last year was recorded at $542.4 billion, an increase of $75.5 billion from the previous year. External debt refers to the debt owed by the South Korean government or private companies to foreign governments or financial institutions, meaning the money (debt) that must be repaid in the future after raising funds in overseas capital markets.

External claims, which are the money to be received from abroad, increased by $73.1 billion to $1.0207 trillion. Therefore, net external claims, which is external claims minus external debt, stood at $478.2 billion, a decrease of $2.4 billion compared to $480.6 billion at the end of the previous year. Bonds with fixed maturity and interest rates, loans, and borrowings are included in external claims. South Korea has been a net external creditor, meaning it has more money to receive from abroad than to repay, since 2000 ($24.9 billion), and this has steadily increased after the global financial crisis, but it turned to a decrease last year.

Despite the increase in external debt, the government and the Bank of Korea evaluated the situation positively. Choi Jin-man, head of the Foreign Investment Statistics Team at the Bank of Korea's Economic Statistics Bureau, said about the increase in external debt, "Foreigners' investment in Korean government bonds increased, and residents issued a lot of securities (Korean paper) overseas," adding, "The increase in investment in Korean government bonds is positive in terms of overseas creditworthiness, and the increase in overseas securities issuance mainly in long-term bonds can also be interpreted positively."

The Ministry of Economy and Finance also explained, "The increase in external debt in 2020 was mainly due to the increase in bank borrowings caused by the expanded demand for foreign currency funds domestically amid the special circumstances of COVID-19, and the expansion of foreign investment in Korean government and public bonds due to their relative stability."

The ratio of debt to be repaid abroad within one year also rose to the highest level in eight years since 2012. The short-term external debt ratio, which is the proportion of short-term external debt in total external debt, was 29.0% at the end of last year, and the short-term external debt ratio relative to reserve assets (foreign exchange reserves) was 35.5%. These represent increases of 0.2 percentage points and 2.6 percentage points respectively compared to the previous year. In 2012, the short-term external debt ratio was 38.8%, and the short-term external debt proportion was 31.1%.

Choi explained, "The rise in the short-term external debt ratio is due to increased overseas securities investment by institutional investors and increased foreign currency borrowings by domestic banks for precautionary funds," adding, "However, the short-term external debt ratio is significantly lower compared to past levels, and considering the central bank's currency swap limits, it is at a stable level."

South Korea's net external financial assets last year were $441.4 billion, a decrease of $59.5 billion. Net external financial assets reflect South Korea's external payment capacity, and at the end of 2019, it recorded an all-time high of $500.9 billion. The significant increase in external financial liabilities compared to external financial assets had a major impact. Last year, external financial assets ($1.9361 trillion) increased by $236.3 billion compared to the previous year-end due to an increase in residents' securities investment balance ($123.4 billion). External financial liabilities ($1.4946 trillion) increased by $295.8 billion compared to the previous year-end due to a large increase in non-residents' securities investment balance ($235 billion). This means that although domestic residents increased their overseas securities investments, overseas investors significantly increased their investments in domestic securities.

Choi analyzed, "Price factors such as stock price increases and the decline in the won-dollar exchange rate (won appreciation) had a large impact on external financial liabilities, which caused net external financial assets to decrease."

This content was produced with the assistance of AI translation services.