South Korea's current account surplus has reached an all-time high due to a boom in semiconductor exports, yet both domestic and foreign investment funds are flowing overseas. As dollar supply from exports increases, domestic investments in foreign stocks and bonds continue, while foreign investors are selling off domestic stocks, which may counteract downward pressure on the exchange rate.
According to preliminary data released by the Bank of Korea on September's balance of payments, domestic direct investment abroad rose by $11.43 billion, a significant increase from the previous month's $6.22 billion. Investments in foreign securities also increased by $16.63 billion, surpassing $16 billion for the second consecutive month. The combined increase from direct and securities investments reached $28.06 billion.
Within foreign securities investments, stock investments rose by $9.91 billion, while bond investments increased by $6.72 billion. Although investments in foreign stocks slightly decreased from $10.15 billion the previous month, they remained at a high level. The increase in foreign bond investments expanded compared to the previous month's $6.44 billion. Cumulatively, from January to September, the increase in foreign securities investments totaled $90.92 billion.
The expansion of foreign bond investments is attributed to rising global interest rates and a decline in the won-dollar exchange rate. The increase in U.S. Treasury yields has made new bonds more attractive, while the strengthening of the won has reduced the burden of purchasing dollar-denominated assets. Kim Young-hwan, head of the Economic Statistics Division at the Bank of Korea, stated, "The rise in global interest rates and the decline in the exchange rate in South Korea have contributed to the increase in foreign bond investments."
Conversely, foreign investors have significantly withdrawn funds from the domestic stock market. In September, foreign investments in domestic securities decreased by $13.81 billion, a sharp increase from the previous month's decline of $4.85 billion. Notably, the decrease in domestic stock investments accounted for most of this drop, totaling $13.74 billion.
Factors behind the sell-off of domestic stocks by foreign investors include the realization of exchange gains due to the strengthening won, high-interest burdens, and concerns over the semiconductor industry's peak. As the value of the won rises, foreign investors find it advantageous to secure exchange gains, while controversies surrounding AI investment bubbles and uncertainties related to the U.S. midterm elections have also impacted investor sentiment.
Lee Kyung-soo, a researcher at Hana Securities, noted, "The reasons for the market decline and foreign selling pressure are varied, including high interest rates, concerns over semiconductor peak-out, and fears of a ruling party loss in the midterm elections. However, the current foreign selling pressure on the KOSPI has become quite entrenched and is having a trend-setting impact."
This increase in overseas investments may partially offset the impact of the current account surplus on the foreign exchange market. Generally, a current account surplus increases dollar supply, which tends to lower exchange rates, but domestic investments in foreign securities can create demand for dollar purchases. Additionally, foreign selling of domestic stocks may increase dollar demand as investment funds are repatriated.
However, not all of the current account surplus is sold for dollars in the domestic foreign exchange market. Exporting companies may hold the dollars earned abroad in foreign currency or reinvest them overseas, and foreign securities investments can also occur without currency exchange, leading to discrepancies in actual foreign exchange market supply and demand.
Kim added, "While the current account surplus is a factor that generally increases dollar supply, which could lead to lower exchange rates, it is difficult to make definitive statements as various factors influence exchange rates."
* This article has been translated by AI.
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