[Research background] Korea’s net foreign asset position has massively increased in recent years. As this phenomenon is accompanied by a rising demand for foreign investment, there has been growing interest in whether this upward trend will be sustained. Changes in a country’s net foreign asset position are determined by flow (current account balance) and valuation (exchange rates, asset prices) effects, while, in the long run, they are closely correlated with fundamental factors such as demographic and fiscal factors. In this study, drawing on the existing body of research, we attempt to empirically assess the likelihood of stabilization in Korea’s net foreign assets by examining flow and valuation effects, as well as by exploring fundamental factors.
[Increase in net foreign assets and background] Korea’s net foreign asset position turned positive (+) from the third quarter of 2014, as its foreign financial assets grew faster than its foreign financial liabilities. During the fourth quarter of 2024, Korea’s net foreign asset balance rose above USD 1 trillion for the first time to 55% of the GDP as of June 2025. This rapid expansion in net foreign assets was driven primarily by flow effects, as the widening current account surplus caused foreign investment and foreign exchange reserves to rise. Valuation effects have mostly worked to reduce the net foreign asset position. However, from the early 2020s onwards, negative (-) valuation effects have been significantly reduced amid an increase in foreign equity investment and the strength of the U.S. stock market.
[Assessment of the outlook for stabilization of net foreign assets] The national panel data of Korea and major countries were analyzed to determine whether there is a stabilizing trend in net foreign assets. 1) While the current account balance was found to have no statistically significant relationship with changes in net foreign assets, asset prices appeared to have stabilizing effects. The results showed that when a country’s net foreign asset position increased, this caused the prices of its domestic assets to rise faster than the prices of foreign assets, which, in turn, lowered the net foreign asset position back to a stable level. However, the stabilizing effects of asset prices have been generally muted in recent years due to the continuous upward momentum in U.S. stock prices. 2) The analysis also revealed a strong correlation between a country’s net foreign asset position and its fundamental indicators, such as national income and demographic structure. Moreover, the steady-state net foreign asset levels, estimated based on these indicators, tended to rise gradually, particularly among creditor countries.
[Overall assessment and implications]
Although a higher net foreign asset position can have beneficial effects on a country’s external soundness, it can also entail negative implications, such as reduced investment in domestic capital markets, sustained downward pressure on the domestic currency, and increased exposure to global risks. Therefore, policy efforts are needed to make investing in domestic markets more attractive (enhancement of the valuation of listed domestic companies → stimulation of the domestic stock market → reduction of the concentration of investment in foreign assets → slower increase in net external assets).