Korea's net external financial assets, which show the country's external payment capability, have decreased for two consecutive quarters. This is attributed to a greater increase in domestic investment by foreigners compared to overseas investment by Korean investors. The sharp rise in the Korea Composite Stock Price Index (KOSPI) and appreciation of the won appear to have contributed to the increase in foreign investment.
According to the 'international investment position' announced by the Bank of Korea on the 20th, Korea's net external financial assets at the end of the second quarter were estimated at $1.304 trillion, a decrease of $53.6 billion compared to the end of the previous quarter. This marks a decline for two consecutive quarters following the first quarter, which recorded a drop of $18.1 billion.
Net external financial assets are calculated by subtracting 'external financial liabilities,' which refer to foreign investment in the domestic market, from 'external financial assets,' which include residents' overseas investments. This metric signifies Korea's external payment capability. Since turning positive in 2014, net external financial assets reached $1.1023 trillion at the end of last year, making Korea the seventh country in the world to surpass $1 trillion, following Japan, Germany, China, Hong Kong, Norway, and Canada. However, with declines in the first and second quarters of this year, the increasing trend has come to a halt.
The decrease in net external financial assets is due to a more significant increase in external financial liabilities compared to external financial assets. In the second quarter, external financial assets totaled $2.6818 trillion, while external financial liabilities amounted to $1.6514 trillion. Compared to the end of the first quarter, external financial assets rose by $165.1 billion, while external financial liabilities increased by $218.6 billion.
External financial assets increased primarily due to securities investments. In the second quarter, domestic securities investments (stocks and bonds) by residents were recorded at $1.125 trillion. This marked a record high after exceeding $1 trillion for the first time in the first quarter. The increase amounted to $113.2 billion, also the highest ever. Stocks (equity securities) rose by $95.6 billion, recording the highest increase, while bonds (debt securities) saw an increase of $17.5 billion, marking the second highest.
External financial liabilities saw a significant increase, mainly driven by foreign securities investments. In the second quarter, foreign securities investments rose by $186 billion. In terms of growth, this is the second highest on record. Foreign investments in domestic stocks increased by $147.7 billion, marking the second highest, while bonds increased by $38.3 billion, achieving the highest rank. Foreign bond investments surged significantly, particularly in long-term bonds.
However, the non-transaction factors accounted for $170 billion of the increase in securities investments, indicating that the impact of stock prices, exchange rates, and interest rate changes was much larger. As domestic stock prices rebounded, the valuation of stocks held by foreigners increased, and as exchange rates stabilized, the value of stocks translated into dollars also rose. In the second quarter, the KOSPI rose by 23.8%, and the won appreciated by 8.1% against the dollar.
Im In-hyuk, head of the Bank of Korea's Overseas Investment Statistics Team, noted, "In terms of the long-term flow of net external financial assets closely linked to transaction factors, overseas direct investment and securities investments have continued, resulting in net external financial assets exceeding $1 trillion for three consecutive quarters after the fourth quarter of 2024."
As net external financial assets decreased, net external liabilities (external liabilities - external assets) also declined. In the second quarter of this year, Korea's net external liabilities stood at $357.2 billion, a decrease of $10.7 billion compared to the end of the previous quarter. External assets refer to confirmed financial assets held by domestic residents toward non-residents, while external liabilities refer to confirmed financial liabilities. External liabilities exclude non-confirmed equities, stocks, funds, and derivatives.
External liabilities increased by $4.14 billion to $10.928 billion. By maturity, short-term external liabilities rose by $1.84 billion, while long-term external liabilities increased by $2.31 billion. External liabilities (foreign debt) saw increases of $1.77 billion and $3.44 billion in short-term and long-term debt, respectively.
Indicators reflecting external soundness have slightly deteriorated. The ratio of short-term external debt to reserve assets rose to 40.7%, up 4.3 percentage points from the end of the previous quarter, while the proportion of short-term external debt to total external liabilities increased to 22.7%, an increase of 0.9 percentage points.