[2023 Economic Policy] Inclusion of Corporate Bonds in ISA Tax Exemption... Incentive for Individual Investors

Tax Benefits for High-Yield Funds
Reduced Issuance of Government Bonds and KEPCO Bonds This Year

[Asia Economy Reporter Sim Nayoung] The economic policy direction for next year includes measures to unblock funding in the bond market, which had been strained following the Legoland incident. These measures involve providing tax support when investing in bonds and reducing the issuance volume of government and public bonds that have high investment demand. The goal is to direct funds toward areas where money is not circulating, such as corporate bonds, specialized credit finance company bonds, and low credit rating bonds.

Tax Support and Adjustment of Government Bond Issuance

One representative measure is providing tax incentives when individuals invest in corporate bonds. The plan is to channel funds into corporate bonds and small- and medium-sized enterprise stocks within the over-the-counter (K-OTC) market through tax-exempt financial products in Individual Savings Accounts (ISA) sold by securities firms. Currently, ISAs are mainly operated with deposits, funds, and equity-linked securities (ELS) in a single account, and after three years, investors can receive tax exemption benefits of up to 2 million KRW on interest and dividend income (general).

An official from the Ministry of Economy and Finance explained, "We plan to grant tax benefits to high-yield funds as well to encourage investment in low credit rating bonds (BBB+ and below)." High-yield funds are products that focus on speculative-grade bonds with low credit ratings, aiming for high returns, with bonds rated BBB+ or below comprising more than 45% of their holdings.

To diversify bond investment funds, the issuance volume of government and public bonds will be reduced and the timing adjusted. For treasury bonds, issuance volume will be scaled down (177.3 trillion KRW in 2022 → 167.8 trillion KRW in 2023). Based on net issuance (104.8 trillion KRW → 61.5 trillion KRW), this represents about a 40% reduction. Local government bonds will also see a decrease in annual issuance (7.5 trillion KRW → 6.5 trillion KRW), and 80% of local government and public corporation bonds maturing in the first quarter of next year (2 trillion KRW out of 2.5 trillion KRW) will be repaid.

The issuance scale of Korea Electric Power Corporation (KEPCO) bonds will also be significantly reduced compared to this year. Bang Gi-seon, the first vice minister of the Ministry of Economy and Finance, said regarding the National Assembly's legal amendment to expand the issuance limit of KEPCO bonds, "The issuance limit has been decided to be increased sixfold, and I understand that it will proceed directly to the plenary session without going through the Legislation and Judiciary Committee this time." He added, "Both the ruling and opposition parties, as well as the government, share an understanding of KEPCO's financial risks under the current law, so it is expected to proceed without major issues."

Regarding electricity rate hikes, Vice Minister Bang said, "We will raise rates to a level that can eliminate deficits by 2026," and added, "Specific details will be announced through KEPCO and the Korea Gas Corporation by the end of December."

Flexible Operation of Bond Market Stabilization Fund, etc.

An official from the Ministry of Economy and Finance stated, "We will operate the previously announced bond market stabilization measures flexibly, considering market conditions. These measures include a 20 trillion KRW bond market stabilization fund, 16 trillion KRW for purchasing corporate bonds and commercial papers (CP), 15 trillion KRW in guarantees for real estate project financing (PF), and 1.8 trillion KRW for securities company guaranteed PF-asset-backed commercial paper (ABCP) purchases."

Regarding liquidity in financial institutions, the official said, "We will support securing liquidity in the financial sector by postponing the increase of the Liquidity Coverage Ratio (LCR) for banks and easing loan-to-deposit ratio regulations, and will consider additional regulatory flexibility if necessary." If the financial market becomes unstable, the Bank of Korea plans to implement market stabilization measures, including expanding eligible collateral securities for loans.

To secure additional response capacity, the Korea Development Bank and the Export-Import Bank of Korea will enhance their financial soundness through government capital contributions in kind. The Korea Deposit Insurance Corporation will establish a financial stability account to supply liquidity in advance to financial companies and support capital expansion to prevent financial company insolvencies.