Korea Returns to Net Debtor Status

Korea has returned to net debtor status for the first time in eight years, a report released yesterday by the Bank of Korea said.

Net external credit, or overseas credit minus overseas liabilities, reached minus 25.1 billion dollars in September, plunging from 1.7 billion dollars in late June. Korea became a net debtor for the first time since the first quarter of 2000, when national debt reached a net 5.84 billion dollars.

Heavy stock selling by foreign investors played a critical role in the return to net debtor status. Foreign stock investment is not categorized as debt, so when foreign investors sell stocks in the Korean market and remit their dollars overseas, the country’s foreign debt sees no decrease but its dollar-denominated assets fall.

From June to September, foreign investors sold 28.04 billion dollars in Korean stocks and derivatives, an amount close to the nation’s net debt of 25.1 billion dollars.

Other factors included a surge in short-term liabilities at the Korean branches of global banks and the mounting current account deficit.

These factors, however, had already been widely known in the market. The figure dividing short-term debt maturing in a year by foreign exchange reserves was 94.8 percent. Given the figure of under 100 percent, Korea’s net debtor status will not significantly affect the domestic financial market.

The nation is also expected to record a current account surplus over the rest of the year.

Bank of Korea official Yang Jae-ryong said, “When 111.2 billion dollars of debts that need not be urgently repaid, including advance payments for ship exports, are excluded, Korea’s net credit is 86.1 billion dollars.”

The won-dollar exchange rate also dropped seven points to close at 1,489 per dollar.

parky@donga.com