Korea's external position continues to improve

Short-term external debt fell by US$8.1 billion in Q3.

DBS Group Research noted:

The external position has continued to improve. Short term external debt fell by USD 8.1bn in 3Q to USD 132.6bn, the lowest outstanding level since 1Q07. The debt coverage ratio (foreign reserves/short term external debt) has improved further to 2.4, up from 2.2 in the previous quarter.

Thanks to the macroprudential measures adopted by the authorities, the rollover-ratio of domestic banks' short term foreign borrowings has been managed below 100% in the first three quarters of this year and the ratio remained relatively low at 93.2% in October.

Gross external debt increased by USD 3.6bn in 3Q. This was primarily due to the rise in foreign investment in KRW bonds, reflecting the upgrade of Korea's sovereign credit ratings this year and the relatively favorable risk-return profile of KRW bond assets.

Between December 2011 and October 2012, investors from Norway and Switzerland boosted their holdings of KRW bonds by as much as 1727.9% and 115.9% respectively. China also increased its holding of KRW bonds by 6.5%.

Despite the rise in gross external debt, external assets have continued to grow strongly (USD 17.9bn in 3Q), thanks to the central bank's accumulation of foreign reserves. The asset-debt ratio (gross external assets/gross external debt) rose to 1.3 in 3Q, the highest since 3Q07.

As the strong asset position can provide a cushion against the risk of capital outflows, policymakers in Korea may not particularly worry about the rise in foreign holdings of KRW bonds, especially because the ongoing increase in bond inflows is partly driven by structural factors.