The Bank of Korea last week released data that might be viewed as showing improved external soundness in the country’s economy.
Korea’s net international investment position -- the value of overseas assets minus external liabilities -- surged to a record high of $323.2 billion at the end of last year, up $64 billion from a year earlier.
In what could be seen as a more specific signal, the country’s short-term foreign debt was reduced in 2015 as local banks cut back on their borrowing abroad.
Korea’s external debt with a maturity of one year or shorter amounted to $108.7 billion as of the end of last year, down $7.7 billion from a year earlier.
The proportion of short-term debt in the country’s total debt stood at 27.4 percent in 2015, similar to the level in 2014. But the ratio of short-term debt to its foreign exchange reserves declined by 2.5 percentage points to 29.6 percent last year, the lowest in 11 years.
Short-term foreign debt was a worrisome factor for the Korean economy during past financial crises as it left local banks and companies more vulnerable to external shocks. The ratio of the country’s short-term debt to currency reserves soared to 657.9 percent in 1997 during the Asian financial crisis.
Despite the improvement in external debt indicators, policymakers and economists remain worried about foreign investors leaving Korean markets.
Foreign investors, who have extended their longest streak of selling off Korean shares, have recently begun to dump won-denominated bonds. The outstanding amount of foreign investment in local stock and bond markets remained at $551.9 billion at the end of last year, down $39.4 billion from the year before.
The recent sell-off by foreign investors here seems to have been prompted by their concerns over the Korean economy’s heavy reliance on exports, amid tumbling oil prices and a deepening slowdown in China, its largest trading partner.
Finance Ministry officials say the decrease in short-term debt was attributable partly to a drop in trade that resulted in reducing the letter of credit issued. Korea saw its exports plunge by 18.8 percent on-year in January, the fastest monthly decline in more than six years, following an 8 percent drop for the whole of 2015.
The recent decrease in foreign holdings of Korean equities and bonds has also heightened concerns over capital outflows from the country, increasing volatility in the won-dollar exchange rate.
The weakening of China’s currency has further accelerated the devaluation of the won against the dollar, reflecting foreign investors’ wariness of Korean exporters’ heavy dependence on the slowing Chinese economy.
The value of the Korean currency against the greenback has decreased by more than 5 percent so far this year, with the won recently hovering around its weakest position against the dollar in nearly six years.
The current currency volatility will likely make it more difficult for the Bank of Korea to further cut its key interest rate that has been held at a record low of 1.5 percent since June to help boost growth.
Financial policymakers here, who appeared initially to have been inclined toward letting the won continue to lose value, are now taking a more serious tone on the need to curb the depreciation of the currency.
Finance Minister Yoo Il-ho, who also serves as deputy prime minister for economic affairs, said Sunday that the government was keeping close tabs on the market, and was ready to take firm and swift action against any sharp currency swings.
Financial authorities here might also be alarmed over the possibility that the U.S. will tag Korea as a currency manipulator, along with some other countries that have consistently posted trade surpluses, in the coming months after President Barack Obama signs a related bill.
“Korea, together with Taiwan, may be among the first to be designated as countries that fix exchange rates to bolster exports,” said Kim Seong-hoon, a researcher at the Korea Economic Research Institute.
Many economists worry that the government, despite its repeated pledges of firm action, appears to have few effective policy options to cope with possible fallout from financial market turbulence, which might easily dampen any improvement in the country’s external debt soundness.
The government could turn to the expansion of currency swap arrangements with major economies. A recent report by a local research institute noted that such a move could be instrumental in easing foreign investors’ concern over Korea’s long-term financial and foreign exchange soundness.
