"Record-Largest Decline" in Net External Financial Assets: Is Korea's External Payment Capacity at Risk?

Net External Financial Assets Reach Only $64 Billion at End of Q2
Largest-Ever Decline; Lowest Since Q3 2014
Exceptional Stock Market Rally Increases Value of Domestic Stocks Held by Foreigners
Bank of Korea: "Difficult to Interpret as Weakened External Payment Capacity"

Net external financial assets (external financial assets minus external financial liabilities) saw the largest-ever decline in the second quarter of this year, falling to their lowest level since the third quarter of 2014. This was due to a surge in the domestic stock market during the second quarter—much higher than the historical average—leading to an exceptionally large reduction in net external financial assets. However, since the stock market rally was driven by improved corporate performance and consequently a rise in the value of domestic stocks held by foreigners, experts say it is difficult to interpret this as a deterioration of external payment capacity.

On June 30, an employee is monitoring the domestic stock market, etc., in the dealing room at the headquarters of Hana Bank in Jung-gu, Seoul.

According to the "International Investment Position (preliminary) for the Second Quarter of 2026" released by the Bank of Korea on August 20, as of the end of the second quarter, Korea's net external financial assets amounted to only $64 billion. This is the lowest level since net external financial assets turned positive at the end of the third quarter of 2014. The figure plunged by $689.5 billion compared to the end of the previous quarter—the largest drop on record.

This outcome occurred despite a sharp increase in external financial assets, because external financial liabilities also saw an exceptional surge due to the sharp rise in domestic stock prices. External financial assets rose by $201.7 billion from the end of the prior quarter, mainly because residents increased their securities investments. However, external financial liabilities increased even more—soaring by $891.2 billion from the end of the previous quarter, mainly due to the significant inflow of foreign investment into domestic securities.

The Bank of Korea also published a blog post on the same day assessing the implications of this unusual decline in net external financial assets for the Korean economy. Shin Sang-ho, Head of the Capital Flow Analysis Team at the International Department of the central bank, explained, "Exports, led by semiconductors, have been robust, raising expectations for improved performance at related firms. This was reflected in a sharp rise in the domestic stock market," he said. "The increase in domestic stock prices is positive in terms of boosting corporate value, but since the market value of domestic stocks held by foreigners also increases, it automatically raises external financial liabilities in statistics." As a result, although a current account surplus worked to increase net external financial assets, the rise in the market value of domestic stocks held by foreigners more than offset this effect.

Korea's external financial assets exceeded $3 trillion for the first time. At the end of the second quarter, the balance reached $3.0843 trillion, up $201.7 billion from the previous quarter, setting a new record high both in terms of level and quarterly increase. This was due to increased resident investment in securities. Moon Sang-yoon, Head of the Overseas Investment Statistics Team at the Economic Statistics Department 1 of the central bank, stated: "Despite net purchases of overseas equities continuing, global stock market rallies led to increased market values, so equity securities alone rose by $146.2 billion, contributing to a $142.7 billion increase in overseas securities investment."

At the end of the second quarter, the balance of external financial liabilities reached $3.0202 trillion. This was an increase of $891.2 billion from the previous quarter—the largest gain ever recorded for a single quarter. The main factor was a sharp rise in the market value of equity securities ($848.1 billion) due to the rising stock prices, which outweighed the expansion in foreign net sales of domestic stocks and contributed $859.3 billion to the increase.

Shin commented, "It is difficult to see the recent decline in Korea’s net external financial assets as a phenomenon that commonly occurs during export booms," and added, "Unless domestic stock prices rise as steeply as they did in the first half of this year, it is unlikely that net external financial assets will decline by such a scale again." If domestic stock prices rise moderately and the current account remains in surplus, net external financial assets are expected to increase again.

At the end of the second quarter, net external bonds turned to an increase for the first time in three quarters, rising by $2.3 billion from the previous quarter to reach $367.8 billion. External bonds ($1.1806 trillion) grew by $40.7 billion, with short-term bonds ($33.9 billion) centered on trade credit ($16.1 billion) and cash and deposits ($15.1 billion) accounting for most of the increase. The surge in exports led to corresponding rises in trade credit (pre-receipt of export payments) and overseas deposits (post-receipt of export payments). External debt ($812.8 billion) expanded by $38.4 billion, with short-term external debt ($15.0 billion) rising mainly due to cash and deposits ($16.7 billion), and long-term external debt ($23.5 billion) growing mainly due to debt securities ($15.2 billion).

The ratio of short-term external debt to reserves, an indicator of short-term external payment capacity, was 46.5%, up by 3.1 percentage points from the previous quarter. The proportion of short-term external debt in total external debt, indicating external debt soundness, also rose by 0.7 percentage points to 24.4% during the same period. Moon pointed out, "The increase in short-term external debt ($15.0 billion) was due to the expansion of won-denominated deposits and accrued liabilities resulting from foreigners selling domestic stocks, which outpaced the $3.7 billion increase in reserves."

Shin emphasized, "The significance of the decline in net external financial assets depends greatly on the underlying causes. If it is due to a prolonged current account deficit or increased external borrowing, it could raise concerns about declining external stability. However, in this instance—where the reduction stems from improved corporate performance, rising stock prices, and an increase in the market value of domestic stocks held by foreigners—it is difficult to interpret it as an increase in Korea's debt or a weakening of external payment capacity."

This content was produced with the assistance of AI translation services.