Banks drive external debt to new high in Q2

External debt hit a record high in the second quarter as short-term foreign debt spiked due to increased overseas borrowing by local branches of foreign banks, the central bank said yesterday.

The country’s external debt totaled $418.6 billion as of the end of June, up $6.1 billion from three months earlier, according to the Bank of Korea.

Foreign debt rose for the third straight quarter in the second quarter. The country’s foreign debt surpassed the $400 billion mark for the first time in Q1.

“Local branches of foreign banks raised overseas borrowing last quarter, boosting Korea’s foreign debt,” Kim Kyung-hak, head of the BOK’s international investment position team, told reporters.

“Foreigners bought more monetary stabilization bonds with the proceeds from part of the maturing longer-dated Treasury bonds.”

The Q2 figures can be seen as troubling as Korea’s short-term foreign debt grew more sharply than its long-term external debt, indicating that the quality of such debt worsened last quarter.

The short-term foreign debt rose by $5.6 billion on-quarter to $141.4 billion on an increase in overseas borrowing by local branches of foreign banks, it added. The data marked the largest quarterly rise since a $13.8 billion gain in Q1 last year.

Accordingly, the ratio of short-term debt against foreign reserves came in at 45.3 percent as of end-June, up 2.3 percentage points from three months earlier. It marked the highest level since 46.1 percent in the third quarter of 2011.

The BOK downplayed such concerns, saying the second-quarter spike in foreign debt was seen as a one-off incident. In July, foreign banks’ overseas borrowing seemed to fall, it added.

The central bank said Korea’s external debt is estimated to have increased somewhat in July due to foreign investors’ buying spree of local state bonds and debt sales by banks and firms.

“The long-term debt is estimated to have grown last month on foreigners’ state bond investment, but the short-term debt is presumed to have sharply fallen in July,” said another official at the BOK.

Korea’s holdings of high short-term external debt have been a major headache whenever financial turmoil crops up as a surge in foreign debt leaves local banks vulnerable to external shocks. Korea’s net external credit reached $88.1 billion as of the end of June, down $8.4 billion from the previous quarter, due to growth in foreign debt, it noted.
Yonhap