Q3 Short-term External Debt Ratio Down 0.9%p... Bank of Korea and Government Say "Improvement in Soundness Indicators"

Sundae Foreign Financial Assets Increase by $41.9 Billion, Record High
Short-term External Debt Decreases Most in 11 Years, Long-term External Debt Most in 6 Years
Ministry of Economy and Finance: "Banks Have Sufficient Ability to Repay External Debt"

Employees organizing US dollars at the Counterfeit Response Center of Hana Bank Headquarters in Euljiro, Jung-gu, Seoul
[Image source=Yonhap News]

South Korea's net external financial assets increased by $41.9 billion, reaching an all-time high. The short-term external debt ratio, which indicates the country's external payment capacity, also fell by 0.9 percentage points compared to the end of the previous quarter. The Bank of Korea and the government positively evaluated the situation, stating that indicators of external debt soundness have improved and banks have sufficient capacity to repay external debt.

According to the international investment position data for the third quarter released by the Bank of Korea on the 23rd, net external financial assets (external financial assets minus external financial liabilities) stood at $786 billion at the end of the third quarter, up $41.9 billion from the previous quarter. External financial assets decreased by $40.6 billion due to global stock price declines and depreciation of major currencies against the US dollar, but external financial liabilities sharply dropped by $82.6 billion due to declines in domestic stock prices and the Korean won against the US dollar, resulting in an overall increase in net assets.

Net external claims (external claims minus external liabilities) amounted to $379.6 billion, down $6.5 billion from the end of the previous quarter. Specifically, external claims decreased by $29.6 billion, mainly due to reserve assets. The Ministry of Economy and Finance explained, "this was caused by a decrease in foreign exchange reserves due to measures to ease foreign exchange market volatility (-$21.5 billion) and a reduction in long-term foreign currency securities investments by other sectors (non-bank sectors, public, and private enterprises) (-$7.3 billion)."

Regarding external liabilities, they decreased by $23.1 billion due to reductions in borrowings by deposit-taking institutions and debt securities of the general government. Short-term external debt with maturities of one year or less stood at $170.9 billion, down $12.9 billion, and long-term external debt with maturities over one year was $468 billion, down $10.1 billion. By sector, external debt decreased for the government (-$11.1 billion), the central bank (-$5.5 billion), and banks (-$6.6 billion), while external debt for other sectors such as non-bank, public, and private enterprises increased by $0.2 billion.

Short-term external debt recorded its largest decline in 11 years since the third quarter of 2011 (-$15.8 billion), and long-term external debt saw its largest drop in about six years since the fourth quarter of 2016 (-$13.8 billion).

Yoo Bok-geun, head of the Bank of Korea's Foreign Investment Statistics Team, explained the background of the short-term external debt reduction, saying, "The biggest factor was the decrease in short-term borrowings by deposit-taking institutions," adding, "This was due to a slowdown in overseas investment demand by residents amid ongoing global financial market uncertainties, along with a partial decline in foreign investors' demand."

The ratio of short-term external debt to South Korea's reserve assets (foreign exchange reserves) was 41.0%, down 0.9 percentage points from the previous quarter. This was because the decrease in short-term external debt was larger despite a $21.5 billion reduction in foreign exchange reserves. As short-term external debt (-7.0%) declined faster than long-term external debt (-2.1%), the proportion of short-term external debt to total external debt also fell by 1.0 percentage point to 26.8%.

Yoo said, "In terms of external debt soundness, the third quarter showed improvement compared to the second quarter," adding, "Overall, the situation is not considered bad."

The Ministry of Economy and Finance also stated in a press release that "both long-term and short-term external debts have turned to a declining trend, improving external debt soundness indicators," and "banks have sufficient capacity to repay external debt." According to the ministry, the foreign currency liquidity coverage ratio of domestic banks was 126.6% as of the end of September, significantly exceeding the regulatory ratio of 80%.

The ministry emphasized, "Although external debt soundness has generally improved, we will continue to closely monitor trends in capital inflows and outflows, maturity structure, and their impact on the foreign currency funding market, while strengthening efforts to manage external soundness," adding, "given the ongoing uncertainties in international financial markets such as the US interest rate hike path, we will closely monitor external debt trends in cooperation with related agencies."

It further explained, "We will carefully monitor the domestic foreign currency liquidity situation to ensure that the ongoing expansion of foreign exchange hedging ratios by public institutional investors does not lead to a sudden surge in short-term borrowings, and strive to maintain market stability," adding, "Additionally, we plan to continue efforts to lengthen the maturity structure of external debt by encouraging long-term foreign currency bond issuance, mainly by public institutions."

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