"Record Drop in Q2" Shrinking Net External Financial Assets: Is Korea’s External Payment Capability at Risk?

Net External Financial Assets at Only $6.4 Billion at End-Q2
Largest-Ever Decline, Lowest Level Since Q3 2024
Unusual Stock Market Rally Drives up Value of Korean Shares Held by Foreign Investors
Bank of Korea: "Difficult to Interpret as We

Net external financial assets (external financial assets minus external financial liabilities) decreased by the largest margin ever in the second quarter of this year, falling to the lowest level since the third quarter of 2024. This unusually large decline in net external financial assets was due to a much higher-than-usual increase in domestic stock prices in the second quarter. However, experts note that the increase in stock prices resulted from improved earnings by domestic companies, and, as a result, the increased value of domestic stocks held by foreigners is the main factor behind the change. Therefore, it is difficult to interpret this as a weakening of the country's external payment ability.

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 (provisional) for the second quarter of 2026" announced by the Bank of Korea on the 20th, as of the end of the second quarter, South Korea's net external financial assets stood at only $64 billion. This is the lowest level since the third quarter of 2014, when net external financial assets first turned positive. This represents a steep drop of $689.5 billion compared to the end of the previous quarter — the largest decline on record.

Despite a sharp increase in external financial assets, external financial liabilities showed an unusual surge because of the dramatic rise in domestic stock prices. External financial assets increased by $201.7 billion compared to the previous quarter, mainly owing to greater securities investment by residents. However, external financial liabilities rose by an even greater amount, surging by $891.2 billion over the previous quarter, largely due to significant increases in foreign investment in domestic securities.

The Bank of Korea also posted a blog entry on the same day to provide context for the meaning of this unusual decline in net external financial assets for Korea's economy. Shin Sangho, Capital Flow Analysis Team Manager in the International Department at the Bank of Korea, explained, "With robust exports led by semiconductors, there were heightened expectations for improved earnings of related companies, which in turn drove a sharp rise in domestic stock prices. The increase in domestic stock prices is positive in that it reflects higher corporate valuations, but since the assessed value of domestic stocks held by foreigners also increases, it is recorded statistically as a rise in external financial liabilities." As a result, even though the current account surplus usually helps increase net external financial assets, the surge in the valuation of domestic stocks held by foreigners outweighed that effect.

South Korea's external financial assets exceeded $3 trillion for the first time ever. The balance at the end of the second quarter was $3.0843 trillion, up by $201.7 billion from the previous quarter, setting yet another record high. This increase was the largest ever recorded for a single quarter, driven by expanded securities investment by residents. Moon Sangyoon, head of the International Investment Statistics Team at the Bank of Korea's Economic Statistics Department 1, explained, "Overseas securities investment increased by $142.7 billion, driven by a $146.2 billion rise in equity securities, as net purchases of stocks continued alongside strong performances in global stock markets."

The balance of external financial liabilities stood at $3.0202 trillion as of the end of the second quarter. This was an increase of $891.2 billion over the previous quarter — the largest-ever quarterly growth. This was mainly the result of a $859.3 billion surge in equity securities, whose assessed value rose sharply despite foreign investors increasing net sales of domestic stocks, due to the substantial increase in market prices.

Shin noted, "It is difficult to see the recent decline in Korea's net external financial assets as a phenomenon that typically recurs during export booms. In particular, if domestic stock prices do not continue to rise at the same level as in the first half of this year, it is unlikely that net external financial assets will see such a sharp contraction again." He added that if domestic stock prices rise moderately and current account surpluses persist moving forward, 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. The balance rose by $2.3 billion over the previous quarter to reach $367.8 billion. External bonds (worth $1.1806 trillion) grew by $40.7 billion, mainly due to an increase in short-term bonds ($33.9 billion), focusing on trade credit ($16.1 billion) and cash and deposits ($15.1 billion). The substantial expansion of exports led to growth in trade credit (before receiving export payments) and overseas deposits (after receiving payments). External debt (worth $812.8 billion) increased by $38.4 billion, with short-term external debt ($15 billion) rising mainly in cash and deposits ($16.7 billion) and long-term external debt ($23.5 billion) growing mainly in debt securities ($15.2 billion).

The ratio of short-term external debt to foreign reserves — a key indicator of short-term external payment capacity — stood at 46.5%, an increase of 3.1 percentage points compared to the previous quarter. The proportion of short-term external debt to total external debt, which measures the soundness of external debt, also rose by 0.7 percentage points to 24.4% over the same period. Moon pointed out, "The increased scale of short-term external debt ($15 billion), resulting from foreign investor sales of domestic stocks leading to an expansion of KRW-denominated deposit reserves and accounts payable, outpaced the increase in foreign reserves ($3.7 billion)."

Shin emphasized, "The implications of a decline in net external financial assets vary greatly depending on the cause. If such a decrease results from a sustained current account deficit or increased external borrowing, there would be legitimate concerns about weakened external soundness. However, in this case, the reduction was due to improved earnings of domestic companies, a surge in stock prices, and the resulting increase in the value of domestic stocks held by foreigners. Therefore, it would be inappropriate to interpret this as an increase in the country's debts or as a weakening of Korea's external payment ability."

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