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[Editorial] Korea Becomes a Net Debtor

Posted August. 30, 2008 03:26,   


Korea’s net foreign credit (foreign credit minus foreign debt) reached a mere 2.7 billion dollars in late June, falling more than 10 billion dollars for three months. The country probably became a net debtor in August since foreign debt kept growing due to the current account deficit. Korea had become a net creditor nation in June 2000, having overcome the Asian financial crisis.

If a nation becomes a net debtor, it faces a higher risk of a sovereign rating downgrade and flight of foreign investment. What is more worrying than foreign debt is the details of the debt. Of 420 billion dollars of foreign debt, 222.3 billion dollars are short-term debts to mature in a year. With 247.5 billion dollars in foreign exchange reserves, Korea will have just 25.2 billion dollars left if it repays its foreign debts. Worse, as the government is likely to sell more dollars to prop up the won, foreign exchange reserves are likely to decrease further. Against this background, Korea should not feel comfort in its status as the world’s sixth-largest holder of foreign exchange reserves.

As foreign investors withdrew their money from domestic stocks and bonds, the capital deficit hit 5.7 billion dollars in July, the biggest since December 1997 when the financial crisis erupted. The current account deficit was 7.8 billion dollars in the first seven months of this year and the service deficit snowballed due to a surge in overseas travel during summer vacation. As the dollar gets scarcer in the market, rumors are spreading of a financial crisis in September as foreign investors withdraw their money all at once.

The government, however, insists the situation is not as serious as the statistics say. It says the capital brought in by foreign bank branches in Korea is also considered foreign debt. Given rapidly growing foreign debt, however, effective measures are needed to prevent foreign debt from threatening the economy. Most of all, the government must make an all-out effort to reduce the deficits in the current account and service balances, both of which have been in the red for a long time.

A change is also needed in foreign currency policy, which was adopted when the country had abundant foreign exchange reserves. The government must remember the nightmare in 1997, when the economy went under due to heavy short-term debts.