SEOUL, May 27 (AJP) - South Korea’s external financial liabilities posted their fourth-largest quarterly increase on record in the first quarter, driven mainly by a sharp rise in the value of domestic stocks held by foreign investors.
External financial liabilities refer to Korean assets owned by foreign investors, including local stocks and bonds. When the domestic stock market rises, the value of those foreign-held assets also increases, mechanically expanding Korea’s external liabilities on paper.
The increase reflected valuation gains from the KOSPI’s rally rather than a large inflow of new foreign investment into local stocks and bonds.
According to preliminary data released Wednesday by the Bank of Korea, external liabilities stood at $2.129 trillion at the end of March, up $147.1 billion from the previous quarter.
External financial assets rose by only $15 billion to $2.8826 trillion over the same period.
As liabilities increased much faster than assets, net external financial assets fell by $132.1 billion to $753.6 billion, marking the second-largest quarterly decline on record.
In other words, Korea’s net external position weakened largely because the value of domestic assets owned by foreigners rose faster than the value of overseas assets held by Koreans.
Net external financial assets had surpassed $1 trillion for the first time at the end of 2024, reaching $1.102 trillion. They later fell to $904.2 billion at the end of last year before dropping further into the $700 billion range in the first quarter.
The latest decline was driven largely by non-transaction factors, including asset price movements and exchange rate changes.
Transaction factors reduced external financial liabilities by $14.3 billion in the first quarter. But non-transaction factors increased them by $161.4 billion, showing that the liability increase was mainly an accounting effect rather than fresh capital inflow.
In practical terms, existing foreign investors simply saw the value of their Korean stock holdings rise sharply as the market rallied.
The biggest factor was the domestic stock market rally. The KOSPI rose 19.9 percent in the first quarter, climbing from 4,214.2 to 5,052.5.
As a result, foreign investors’ holdings of Korean equity securities increased by $122.1 billion from the previous quarter to $1.0325 trillion.
By contrast, Korea’s overseas asset growth was limited by weaker global stock markets and higher bond yields.
Outbound direct investment by Korean residents increased by $15.4 billion, but outbound securities investment fell by $15.1 billion. Overseas equity securities declined by $9.3 billion, while overseas debt securities fell by $5.8 billion.
As overseas stock and bond prices fell, the market value of foreign assets held by Korean investors also declined.
The decline in overseas equity assets reflected weak global stock markets. In the first quarter, the Dow Jones Industrial Average fell 3.6 percent, the Nasdaq dropped 7.1 percent and Japan’s Nikkei 225 lost 6.1 percent.
Higher long-term interest rates in the United States and Japan also weighed on the valuation of overseas bonds. The U.S. 30-year Treasury yield recently rose above 5 percent, its highest level in about 19 years, while Japan’s 10-year government bond yield climbed to the 2.7 percent range, the highest since 1996.
A different trend appeared in Korea’s domestic bond market.
Foreign investors’ holdings of Korean debt securities fell by $13.8 billion from the previous quarter to $440.4 billion, hit by a weaker won and falling bond prices.
The three-year Korean Treasury yield rose to 3.55 percent at the end of March from 2.95 percent at the end of last year. The 10-year yield climbed to 3.88 percent from 3.39 percent over the same period.
The won also weakened 4.7 percent against the dollar, moving from 1,447.70 won at the end of last year to 1,515.00 won at the end of March. The weaker currency reduced the dollar value of won-denominated bonds held by foreign investors.
External debt indicators also weakened slightly.
Net external credit stood at $365.5 billion at the end of March, down $7.6 billion from the previous quarter. External credit fell by $3.3 billion to $1.1399 trillion, while external debt rose by $4.2 billion to $774.4 billion.
Short-term external debt increased by $4.2 billion to $183.6 billion. Foreign exchange reserves fell by $4.4 billion to $423.7 billion.
The ratio of short-term external debt to reserve assets rose by 1.4 percentage points to 43.3 percent. The share of short-term debt in total external debt also increased by 0.4 percentage point to 23.7 percent.
However, both figures remain well below crisis levels. The short-term external debt-to-reserve ratio reached 78.4 percent in the third quarter of 2008 during the global financial crisis.
Copyright ⓒ Aju Press All rights reserved.