S. Korea's external debt nears US$400 bln in Q2

SEOUL, Aug. 23 (Yonhap) -- South Korea's external debt hit a fresh record high in the second quarter on foreigners' buying spree of local bonds, but the growth of its short-term foreign debt eased due to tighter rules on currency derivatives, the central bank said Tuesday. South Korea's external debt amounted to a record of US$398 billion as of the end of June, up $15.4 billion from three months earlier, according to the Bank of Korea (BOK). The second-quarter growth compared with a $22.6 billion on-quarter gain tallied in the first quarter. The country's short-term foreign debt reached $149.7 billion as of end-June, up $1.3 billion from three months earlier. The growth was eased from a $13.5 billion advance in the first quarter. "Foreign investors increased their investment in local government bonds last quarter, raising the weight of long-term external debt. Short-term borrowing growth slowed from the first quarter due to stiffer rules on banks' holdings of FX forward deals," Cho Yong-seung, head of the BOK's international investment position team, told a press briefing. Cho said rising external debt should be carefully monitored, but given the country's capacity to service the foreign debt and the debt structure, the country's overall debt situations appear to be fine. The data came as the global financial markets have been roiled by the first-ever U.S. credit downgrade and the eurozone debt crisis. Market watchers expressed concerns that if the market protracted, South Korea's financial stability and FX liquidity conditions could be squeezed as they did at the height of the 2008 global financial turmoil. South Korea's holdings of high short-term external debt has been the main source of concern whenever a financial crisis crops up after a surge in foreign debt leaves local banks vulnerable to external shocks. In a move to smooth excessive cross-border capital movement, the government further tightened rules on banks' foreign exchange derivatives positions in May. South Korea began to impose a levy on banks' non-core external borrowing in August. In the second quarter, financial firms' overseas borrowing grew at a slower pace than in the first quarter, due to the tighter regulations. Local banks' short-term overseas borrowing rose by $280 million on-quarter while their long-term borrowing grew by $4.17 billion. Short-term foreign debt accounted for 37.6 percent of the total external debt as of end-June, down from 38.8 percent from the preceding quarter. In the height of the 2008 global financial crisis, the weight shot up to 51.9 percent, the BOK said. "Foreign investors increased their investment in Korean treasuries last quarter, indicating the country's sound economic fundamentals," Cho said. Meanwhile, South Korea's net external credit reached $89.5 billion as of the end of June, up $3.2 billion from three months earlier, the BOK noted. Foreign investment in South Korea increased in the second quarter as banks' overseas borrowing expanded and foreign investors snapped up local bonds and stocks, it added. The won's ascent to the dollar also raised the value of foreigners' shareholdings. Outstanding foreign investment, including securities investment, stood at $894.9 billion as of end-June, up $27.4 billion from the previous quarter, it added.