The Korean Economic Forum
A Tale of Two Countries
Kyungsoo Kim (Sungkyunkwan University)Year 2020Vol. 13No. 3
In the last decade, the net foreign assets (NEA) of both Korea and the United States have shown the opposite pattern from the previous decade. Korea’s NEA,which had recorded negative despite the current account surplus (CA), has turned to a positive. Meanwhile, in the United States, there has been a decline in the NEA, that is far less than the CA deficit. These two phenomena can not be viewed as a coincidence and should be explained. First, the change in the NEA pattern took place primarily in external debt (EL) in both countries and was driven by valuation channels. Here, the strong dollar along with the preference for global safe assets due to global financial vulnerabilities seems to have had a major impact on ELs. Second, the rates of return on Korea’s external assets (EA) and US EL has converged. This is because both Korea’s EA and USEL have been rebalanced to high-yield components such as ‘stocks.’ In Korea,the share of ‘direct investments’ and ‘stocks’ increased, which led to an increase in return on EA, while the share of ‘reserves’ decreased significantly. Likewise,the share of ‘stocks’ in US EL increased while the share of ‘other investments’decreased. Increasing demand for risky assets of the center country means that international capital flows motivated by risk diversification are increasing. The paper discusses the policy implication of EA configuration evolving under the current Korea’s foreign exchange system.