Korea's net external financial assets, which demonstrate the country's ability to make international payments, have turned to a decrease for the first time in five quarters. This is due to a larger increase in foreign investment in the domestic market compared to overseas investments by local retail investors. However, the net external financial assets maintained a surplus of $1 trillion due to a large current account surplus.
According to the 'international investment position' announced by the Bank of Korea on the 28th, the net external financial assets for the first quarter of this year were recorded at $1.084 trillion, a decrease of $18.1 billion from the end of last year. As a result, the growth trend that had continued from the first to the fourth quarter of last year has been interrupted for the first time in five quarters.
Net external financial assets are the amount obtained by subtracting 'external financial liabilities', which are foreign investments in Korea, from 'external financial assets', which include residents' overseas investments. This indicates Korea's ability to make international payments. Net external financial assets turned positive in 2014 and reached $1.1023 trillion at the end of last year, becoming the seventh country in the world to surpass the $1 trillion mark, following Japan, Germany, China, Hong Kong, Norway, and Canada. However, with the turn to a decrease in the first quarter of this year, the growth trend has been halted.
The decrease in net external financial assets was due to a larger increase in external financial liabilities compared to external financial assets. In the first quarter of this year, external financial assets amounted to $251.68 billion, while external financial liabilities were recorded at $143.28 billion. Compared to the end of last year, external financial assets increased by $4.2 billion, and external financial liabilities rose by $22.2 billion.
Specifically, external financial assets increased centered around securities investments. In the first quarter, domestic securities investments totaled $101.18 billion, an increase of $17.6 billion compared to the end of last year. This is due to expectations of interest rate cuts in the U.S. and adjustments in the stock market, leading to simultaneous increases in overseas stock and bond investments. Direct investments also increased by $15.7 billion to $77.84 billion, particularly in the secondary battery sector. However, the Bank of Korea's reserve assets decreased by $5.9 billion to $40.97 billion due to an expansion in foreign exchange swaps with the National Pension Service, limiting the extent of the increase.
External financial liabilities increased significantly, primarily driven by foreign securities investments. In the first quarter, foreign securities investments amounted to $86.5 billion, an increase of $30.1 billion compared to the end of last year. This increase is attributed to the rising valuation of stocks held by foreigners due to the rebound of domestic stock prices, along with sustained foreign bond investments, particularly in long-term bonds. Direct investments increased by $4.1 billion to $29.11 billion, and other investments rose by $1.5 billion to $22.98 billion.
Park Seong-gon, head of the overseas investment statistics team at the Bank of Korea, noted, "This decrease is the result of external financial liabilities increasing more than external financial assets," and added that "The temporary decrease in reserve assets during the first quarter due to foreign exchange swaps with the National Pension Service and the decline in the foreign assets of deposit-taking institutions, particularly in highly volatile items, also contributed to the decrease in net external financial assets."
As net external financial assets declined, net external liabilities (external liabilities - external assets) also decreased. In the first quarter of this year, Korea's net external liabilities amounted to $36.79 billion, a decrease of $1.92 billion from the end of last year. External liabilities refer to confirmed financial liabilities of residents in Korea to non-residents, while external assets refer to confirmed financial assets. External liabilities exclude equity, stocks, funds, and derivatives with undetermined pricing.
External liabilities were reported to be $101.5 billion, a decrease of $8.7 billion from the end of last year. By period, short-term (maturity within one year) liabilities amounted to $60.61 billion, while long-term (maturity over one year) liabilities were recorded at $44.52 billion. Compared to the end of last year, short-term liabilities decreased by $2.25 billion, while long-term liabilities increased by $1.38 billion. Short-term liabilities were affected by the decrease in Central Bank reserve assets, while long-term liabilities increased due to rising investments in debt securities.
External assets amounted to $68.34 billion, showing an increase of $1.05 billion from the end of last year. During the same period, short-term liabilities increased by $2.8 billion to $14.93 billion, while long-term liabilities increased by $7.7 billion to $53.41 billion. Both short-term and long-term liabilities increased due to inflows of foreign investment funds into bonds.
Indicators reflecting foreign exchange soundness have somewhat deteriorated. The ratio of short-term foreign debt to external liabilities rose to 21.9%, slightly up from 21.8% at the end of last year. The ratio of short-term foreign debt to reserve assets was also recorded at 36.5%, an increase from 35.3% at the end of last year. However, both indicators remain below the average levels for the past five years (2020-2024), which were 26.0% and 37.5%, respectively.
Park added, "The decrease in reserve assets is a temporary fluctuation due to the characteristics of swap transactions with the National Pension Service and is not expected to be seen as a trend of decline," and noted, "If short-term foreign debt had increased primarily due to a lack of domestic foreign currency liquidity focused on borrowing funds, it could signal a negative aspect. However, this time it was due to an increase in foreign investment in domestic bonds, so the qualitative aspect of the external debt composition is not significantly problematic."
Meanwhile, the Ministry of Economy and Finance issued a press release regarding the status of external liabilities on the same day, stating, "As uncertainties in the external sector may increase due to changes in the global trade environment and capital flows, major currency policy shifts, and interest rate movements, the government will closely monitor the trends in external liabilities alongside the conditions in the international financial market."