Korea's Short-term External Debt Ratio Rises 2.1%p in Q2... Government Says "Stable"

MoEF to Announce 'Q2 External Bonds and Debts Trends' on 19th
"US Monetary Tightening and Interest Rate Hike Outlook Also Partially Affect External Debt Increase"

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Moon Chaeseok] Although external debt soundness indicators such as the short-term external debt ratio slightly deteriorated in the second quarter of this year, the government assessed them as "relatively favorable." The increase in external debt was explained by the fact that foreign investors held a favorable view of the Korean economy.

However, regarding the larger increase in short-term external debt, it was also evaluated that "the market's preemptive funding demand due to expectations of U.S. monetary tightening and interest rate hikes had some influence." This is a message from the government that it will thoroughly manage external soundness because if the U.S. withdraws the money it had injected to overcome the COVID-19 crisis, uncertainty in the Korean market, classified as an emerging market in the financial market, could increase.

According to the '2021 Q2 External Claims and Liabilities Trends' announced by the Ministry of Economy and Finance on the 19th, Korea's external debt as of the end of the second quarter was $604.2 billion. This increased by $38.3 billion from $565.9 billion at the end of the previous quarter. External debt refers to funds raised by the government or private companies through foreign governments and financial institutions that must be repaid in the future.

Source: Ministry of Economy and Finance

Short-term external debt with a maturity of one year or less was $178 billion, up $12.3 billion from the previous quarter, and long-term external debt with a maturity exceeding one year was $426.2 billion, up $26 billion. The short-term external debt ratio, which is the proportion of short-term external debt in total external debt, slightly increased to 29.5% from 29.3% in the previous quarter. The short-term external debt ratio relative to foreign exchange reserves rose by 2.1 percentage points to 39.2% compared to the previous quarter.

The Ministry of Economy and Finance explained, "Although the short-term external debt ratio and proportion slightly increased, they remain significantly lower than during past crises and are relatively favorable compared to other emerging countries." While the first quarter, which also showed an upward trend, was assessed as "similar to the past average," the second quarter was evaluated more conservatively as "significantly lower than past crises."

According to the Ministry, at the end of September 2008, just before the global financial crisis, Korea's short-term external debt ratio was 51.7%, and the proportion was 78.4%, more than double the second quarter's '29.5% and 39.2%.' As of the first quarter, short-term external debt ratios of emerging countries were Turkey 162%, Argentina 103%, Malaysia 95%, and South Africa 55%, all higher than Korea's 37.1% in the first quarter.

The Ministry said, "The expanded increase in external debt in the second quarter was influenced not only by abundant global liquidity and the investment attractiveness of our economy but also by preemptive funding demand due to expectations of U.S. monetary tightening and interest rate hikes." It added, "Non-residents' domestic bond investment accounted for $18.2 billion, or 47% of the $38.3 billion increase in external debt in the second quarter," attributing this to foreign investors' favorable view of the Korean economy.

Regarding the $3.8 billion increase in overseas bond issuance, the Ministry explained, "This resulted from improved overseas financing conditions for domestic institutions due to the highest-ever national credit rating and favorable external credibility," adding, "The credit default swap (CDS) premium, which indicates the risk level of national default, was 18 basis points, the lowest since the 2008 global financial crisis."

External claims, which refer to money to be received from overseas, amounted to $1.061 trillion, up $30.4 billion from $1.0307 trillion in the previous quarter. This was influenced by domestic bond investments by the government and central bank and increased securities issuance by banks. Net external claims, calculated by subtracting external debt from external claims, stood at $456.9 billion at the end of the second quarter, down $7.9 billion from the previous quarter. The Ministry said, "Considering the record-high foreign exchange reserves ($458.7 billion), external claims ($1.061 trillion), and net external claims ($464.8 billion), overall external soundness is also assessed to be at a stable level."

Given that external uncertainties have not yet dissipated, the government said it will continue efforts to manage soundness. The Ministry stated, "As international financial market uncertainties persist due to the recent spread of the Delta variant and discussions on the normalization of U.S. monetary policy, we will closely monitor capital inflows and outflows, especially short-term external debt, and strengthen efforts to manage external soundness."

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