South Korea Becoming Net Debtor
By Kim Jae-kyoung
Staff Reporter
South Korea is expected to become a net debtor for the first time in eight years in the months to come, with its net external credit dipping to nearly zero in June as a result of rising foreign debts.
Some analysts say that rapid debt growth is worrisome as it is posing a threat to the world's 13th largest economy, scaring away foreign investors.
In a report on the nation's net external position, the Bank of Korea (BOK) said Thursday that net external credit for Korea plunged to $2.71 billion in June, a drastic setback from $13.16 billion in March and $35.53 billion in December.
It was the worst since December 1999 when the country posted a net external debt of $6.8 billion. The worsening net external position was due to rising foreign debts combined with falling international credit.
Given rising foreign debts and shortfalls in the current account, it is highly probable that the country will become a net debtor soon, according to analysts.
``If we look into the context of Korea's deteriorating external position, Korea's net external position is going back to be a net debtor from a net creditor,'' Takahira Ogawa, S&P director for sovereign ratings, said in a recent interview with The Korea Times.
In June, the country's combined foreign debts reached $419.8 billion, up 1.44 percent from March. Of the total, short-term debt stock on a remaining maturity basis ― short-term debt plus long-term debts that will mature within a year ― came to $222.3 billion in June, compared to $216.1 billion three months ago.
The short-term debt stock accounted for 86.1 percent of the foreign reserves in June, up from 81.6 percent in June, 74.6 percent at the end of 2007 and 55.1 percent at the end of 2006, which will reduce the central bank's leeway to use the reserves.
The current account posted a deficit of $5.35 billion for the first six months of this year, compared with surpluses of $5.95 billion in 2007, $5.39 billion in 2006 and $14.95 billion in 2005.
Citigroup economist Oh Suk-tae said that a heavy debt burden has become one of the key risks for the Korean economy, playing a role of weakening the local currency.
``Concern about potentially large foreign capital outflows from the bond market also reflects financial market worry about debt problems,'' he said.
``Concern about external debt is basically part of greater concern about the overall domestic debt burden, as external debt has been supporting the growth of domestic debt,'' he added.
The increase in external debts during the second quarter came as foreign investors shifted their investment from stocks to bonds, while Koreans put their investments into overseas stocks.
However, the key culprit behind the rapid build-up of short-term external debt over a longer period was the explosive growth of commercial bank lending and bank deposit bases.
The overseas borrowing in the banking sector soared to $210.49 billion in June from $194 billion at the end of 2007, $136.5 billion at the end of 2006 and $83.4 billion at the end of 2005.
``Rapid loan growth has forced Korean banks into the capital market for funding, which became a source of vulnerability when the credit crisis erupted in August 2007 and remains the Achilles heel of the economy today,'' ING Group chief economist Tim Condon said.
``The high level of debt and its rapid growth since 2006 constrain Korea's credit rating. It is conceivable that debt could grow to a level that puts the rating under downgrade pressure,'' he added.