Korea's net foreign assets (NFA) surpassed $1 trillion, strengthening external soundness, but the concentration of overseas investments increased downward pressure on the won-dollar exchange rate.
According to the report released by the Bank of Korea on the 5th, "BOK Issue Note: Assessment of the possibility of stabilizing net foreign assets and implications," Korea's net foreign assets surpassed $1 trillion for the first time ever in the fourth quarter of last year. As of June this year, it was 55% of gross domestic product (GDP), the highest on record.
Net foreign assets are the value obtained by subtracting external financial liabilities, which are foreign investment in Korea, from external financial assets, such as overseas investment by domestic residents, and show Korea's external payment capacity. Korea's net foreign assets turned positive for the first time in the third quarter of 2014 as external financial assets increased faster than external financial liabilities after 2010, and they have continued to rise since.
The research team noted that while the increase in net foreign assets has positive aspects, such as an improved income balance and stronger external soundness, there are also negative aspects, including a weakened domestic capital market investment base due to capital outflows, downward pressure on the exchange rate, global risks, and trade pressures stemming from trade imbalances.
In particular, the research team said, "From the perspective of the foreign exchange sector, as the increase in net foreign assets has been driven by private-sector overseas investment, note that the composition of net foreign assets is shifting from a focus on reserve assets and the banking sector to the private sector." While the foreign-currency assets of banks and the public sector can play a role in buffering fluctuations in foreign exchange supply and demand, private overseas investment has limited capacity to do so.
Based on a country-level panel data analysis, the research team estimated the size of net foreign assets appropriate to Korea's economic fundamentals. As a result, Korea's equilibrium net foreign assets-to-GDP ratio rose from -3% in 2015 to 30% in 2023. However, the actual level of net foreign assets (47%) exceeded the equilibrium level (30%), reflecting factors such as an excessive external saving tendency due to a decline in domestic investment returns.
The research team advised, "It is necessary to ease the excessive tilt toward overseas investment by improving investment conditions in the domestic stock market and revitalizing domestic investment by pension funds."