Overseas investment assets exceed half of GDP…"Foreign exchange safety net vs main culprit behind exchange rate rise" controversy

As Korean individual investors' overseas stock investments and companies' direct investments have increased, Korea's net foreign assets have exceeded half of gross domestic product (GDP). While there are claims that capital outflows are pushing up the exchange rate, there are also arguments that net foreign assets could serve as another foreign exchange safety net.

According to the Bank of Korea's report published on the 5th titled "Assessment of the Stabilizing Potential of Net Foreign Assets and Implications," Korea's net foreign assets (external financial assets - external financial liabilities) amounted to 1.0304 trillion dollars as of the end of the second quarter. This corresponds to 55.7% of GDP.

Net foreign assets turned positive from the third quarter of 2014 and have been increasing steadily since. They exceeded 1 trillion dollars in the fourth quarter of last year, and similar levels have continued for three consecutive quarters since then.

This level is higher than the balance level assessed by the Bank of Korea. Based on fundamentals such as national income and population structure, the Bank of Korea estimates Korea's equilibrium net foreign assets ratio to be about 30% of GDP (as of 2023). Lee Hee-eun, manager of the Bank of Korea's overseas investment analysis team, explained, "Declining domestic asset returns due to population aging and large-scale overseas investments by pension funds have influenced the rapid rise in net foreign assets."

The Bank of Korea expects Korea's net foreign assets to continue to increase for the time being, since factors such as current account surpluses from global trade imbalances, pension funds' overseas investments, and declining domestic investment returns are difficult to resolve in the short term.

Lee said, "The increase in net foreign assets has a positive aspect in strengthening external soundness, but there are negative aspects such as weakening of the domestic capital market investment base due to capital outflows, downward pressure on the won from increased dollar demand, expanded exposure to global risks, and trade-related pressures from trade imbalances."

He pointed out, "In particular, the shift in the composition of net foreign assets from reserve assets and the banking sector (other investment) toward the private sector due to residents' increased overseas investment is noteworthy because foreign currency assets of the banking and public sectors play a buffering role in foreign exchange supply and demand fluctuations." He also advised, "It is necessary to mitigate excessive bias toward overseas investment by improving investment conditions in the domestic stock market and activating pension funds' domestic investment."

Reporter Kang Jin-gyu josep@hankyung.com