The level of foreign debt is poised top $400 billion, complicating Seoul’s capital control efforts increasingly watched by major credit rating agencies abroad.

Foreign debt in the first quarter May made the steepest hikes in three years, reaching $381.9 billion at the end of March. Noting an increase of $21.9 billion in just three months from December, the Finance Ministry predicted the figure to soon reach $400 billion.

“We expect the net foreign debt to reach $400 billion soon, which would be a resistance level which we may start to consider additional policy measures,” a senior ministry official said.

“But there isn’t much we can do to curb foreigners’ holding of government bonds for now,” he said.

Short-term foreign debt with less than 12 months of maturity increased $11.7 billion in the three months period and reached $146.9 billion. Securities with short-term maturities are seen more risky for small-but-open capital markets like Korea vulnerable to dollar shortage.

The increase of foreign debt is largely attributed to foreign purchase of government debt and active trading of non-deliverable forwards, or NDFs. An NDF is a currency financial derivative product used to hedge foreign exchange risks.

“The increase is inevitable as the economy expands. We will continue to monitor areas to intervene in if the rate of increase grows,” the official said.

The Finance Ministry in June urged banks to stem the increase of short-term debt and asked them to assess the risk they face on speculative inflows of foreign currency.

The limit on foreign currency forwards was lowered to 200 percent of bank’s equity for foreign branches, from 250 percent. It was cut to 40 percent from 50 percent for local banks.

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