Korea’s external debt hit a fresh high of $398 billion as of the end of June on steady inflow of foreign capital on bonds, the Bank of Korea said Tuesday.

The growth of short-term foreign debt, considered more volatile to external shocks, grew $1.3 billion to $149.7 billion in the three months. Overseas debt with maturity of more than one year increased by $14.1 billion to $248.2 billion. The increase between April and June was at a slower pace than the rise 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.

The Finance Ministry said it is natural to have more debt as the economy expands.

“External debt makes up about 37 percent of Korea’s gross domestic product, which is lower than that of many advanced economies. The debt is actually growing slower than the country’s trade,” Eun Sung-soo, Head of the International Finance Bureau at the ministry told reporters.

External debt stands at 98.6 percent of GDP in the U.S., and 47.6 percent in Japan.

The ministry said it will keep a close eye on the movement of foreign capital as a sharp surge in external debt could destabilize the financial market. Currency stabilization bonds and treasuries owned by foreigners came in at $74.2 billion as of June, compared with a mere $900 million at the end of 2002.

By Cynthia J. Kim (cynthiak@heraldcorp.com)