Bank of Korea: "Low Likelihood of Net Outflow in Foreign Securities Investment"

Bank of Korea, Financial Stability Report for the Second Half of the Year

The Bank of Korea expects that the pace of the U.S.'s tightening monetary policy will slow down, making it unlikely that there will be a significant outflow of foreign investment funds from domestic stocks and bonds in the future. However, it emphasized the need to closely monitor capital flows, as the recent stagnation in South Korea's current account balance combined with foreign capital outflows could cause a significant shock.

In its Financial Stability Report for the second half of the year released on the 22nd, the Bank of Korea explained the recent trends in foreign securities investment funds. Foreign investment in domestic securities showed a sharp decline in net inflows this year due to the Federal Reserve's monetary tightening. Bond funds experienced net outflows of public funds influenced by the rise in the won-dollar exchange rate, while stock funds saw significant net outflows in the first half of the year before turning to net inflows in the second half.

Resident overseas securities investment has slowed down, especially in stock investment funds, following the Fed's interest rate hikes, but the trends varied by investor type. Asset management companies and individuals showed a slowdown in stock fund increases, and insurance companies reduced new overseas bond investments due to concerns over declining bond yields.

However, banks expanded overseas bond investments due to the end of the foreign currency liquidity coverage ratio (LCR) regulation easing measures and incentives to secure dollar liquidity in preparation for the strengthening of the U.S. dollar. Additionally, the National Pension Service maintains an investment strategy to gradually raise its overseas investment target ratio but reduced the scale of net investments in response to the sharp depreciation of the won-dollar exchange rate in the second half to improve returns.

The Bank of Korea assessed that, given the continued inflow of private bond funds and the considerable adjustment of foreign stock portfolios, the likelihood of a significant outflow of foreign securities investment funds in the future is low. However, it expects resident overseas securities investment funds to continue a net outflow trend.

The Bank of Korea emphasized, "If the current account surplus narrows and net outflows of securities investment funds by foreigners and residents expand, it could worsen foreign exchange supply and demand conditions and increase exchange rate volatility," adding, "It is necessary to closely monitor changes in the investment environment and capital flows of foreigners and residents."

Employees are working in the dealing room of Hana Bank in Myeongdong, Seoul. Photo by Huh Younghan younghan@

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