South Korea will keep close eyes on the flow of foreign capital and a recent surge in external debt that can destabilize the country's economy, the government said Tuesday.

   The announcement comes as the country's external debt hit a fresh high of US$398.0 billion as of the end-June on foreigners' buying spree of local bonds, up $15.4 billion won from three months earlier.

   In an assessment of foreign debt trends, the ministry said that at the present pace of growth the country's foreign debt will probably surpass the $400 billion mark this year.

   "Because of South Korea's heavy dependence on trade and the size of its economy, a rise in foreign debt is inevitable to a certain degree," it said.

   The ministry said that the increases were mainly due to money used in trade financing, foreign currency loans taken out from local banks, and a surge in currency stabilization bonds and Treasuries issued by the government.

   In particular, currency stabilization bonds and Treasuries owned by foreigners reached $74.2 billion as of June from just $900 million at the end of 2002.

   "A sudden rise in foreign debt and so-called speculative funds that can be withdrawn quickly pose systemic risks for the country," it said.

   The ministry said it is keeping close watch on developments in the international financial market and foreign currency markets and will maintain its stance of taking preemptive steps to reduce possible shocks.

   A ministry source, in addition, said measures are being considered to limit investment in local bonds that have been cited for the recent surge in foreign debt.

   "Every option is being reviewed, although no concrete decision has been made at present," he said.

   The finance ministry, however, said that while there has been a rise in foreign debt, the overall size is not very high when compared to the gross domestic product (GDP).

   As of late June foreign debt was equal to 37.6 percent of the GDP, which is 14.3 percentage points lower than September 2008 when the world was rocked by the Lehman Brothers collapse, it said.

   Data also showed that short term debt ratio compared to South Korea's foreign reserve also improved in the past few months, making the country less susceptible to external shock.

   As of the end of June short term debt stood at 49.2 percent of the country's foreign reserve holdings, down 29.9 percentage points from right after the start of the 2008 global financial crisis.

   The ministry pointed out that as of late 2010, South Korea's foreign debt compared to its GDP stood at 35.5 percent, which is much lower than the 98.6 percent reached by the United States and the 47.6 percent tallied for Japan.

Source: Yonhap News (August 23, 2011)