Surge in Q2 Stock Prices Leads to Record Drop in Net External Financial Assets

In the second quarter, a significant rise in domestic stock prices resulted in a record drop in South Korea's net external financial assets. The increase in residents' overseas securities investments and a favorable global stock market partially offset the decline in external financial assets.

According to the Bank of Korea's '2026 Q2 International Investment Position (preliminary)' report released on August 20, net external financial assets (external financial assets minus external financial liabilities) stood at $640 billion at the end of the second quarter, a decrease of $68.95 billion from the previous quarter. This marks the third consecutive quarter of decline, with the drop being the largest since statistics began in 1994. The balance is also the lowest since the third quarter of 2014, when net external financial assets turned positive.

External financial assets increased by $201.7 billion to $3.083 trillion compared to the previous quarter. Residents' overseas direct investments rose by $20.8 billion, driven by equity investments in the United States. Securities investments saw a $142.7 billion increase due to sustained net investments and valuation gains from rising global stock prices.

Conversely, external financial liabilities surged by $891.2 billion to $3.0202 trillion. This increase was primarily driven by a $859.3 billion rise in foreign investments in domestic securities. Notably, the value of domestic equity securities held by foreigners increased by $848.1 billion, influenced by the rise in domestic stock prices.

Despite foreign investors selling domestic stocks, the significant increase in stock prices led to a substantial rise in the value of their holdings. The KOSPI index rose from 5,052.5 to 8,476.5, a 67.8% increase during the second quarter. During the same period, the value of the won fell by 1.8% against the dollar.

Meanwhile, net external debt, calculated as external debt minus external claims, rose by $2.3 billion to $367.8 billion. External claims increased by $407 billion to $1.1806 trillion, while external debt rose by $384 billion to $812.8 billion.

Choi Jae-hyuk, head of the Bank of Korea's Capital Movement Analysis Team, stated, "Although net external financial assets have decreased, the scale of residents' overseas assets has not diminished, and income from overseas assets continues to grow. This decline is due to a significant increase in external financial liabilities resulting from rising domestic stock prices, not a depletion of overseas assets. Therefore, the assessment that we can buffer foreign currency supply and demand through the sale of overseas assets and domestic repatriation in the event of external shocks remains valid."

Short-term external debt rose by $15 billion to $198.5 billion compared to the previous quarter. Consequently, the ratio of short-term external debt to reserve assets increased to 46.5%, up 3.1 percentage points from the previous quarter. The proportion of short-term external debt within total external liabilities also rose to 24.4%, an increase of 0.7 percentage points.

Moon Sang-yoon, head of the Bank of Korea's Foreign Investment Statistics Team, noted, "The 46.5% ratio of short-term external debt to reserve assets is the highest level since the end of the second quarter of 2011. However, the increase in short-term external debt is not due to borrowing issues as seen in the past, but rather because foreign investors sold domestic stocks and did not convert all of it to foreign currency, leaving some in domestic won deposits. This is the main factor behind the increase."

He added, "Excluding the impact of foreign sales of domestic stocks, this ratio does not differ significantly from the previous quarter. While headline indicators have risen, we do not see this as a situation that would lead to liquidity issues."