Additional Supplementary Budgets Expected... Will 'Record-High' Government Bond Issuance Increase Further? [Why&Next]

Democratic Party Demands at Least 20 Trillion Won in Extra Budget
Calls for Issuance of "Deficit-Financing Bonds"
Government Bond Issuance to Exceed 200 Trillion Won This Year
Could Increase Further with New Administration's Supplementary Budget
Rising Fiscal Concerns Over Growing Government Debt
"Strong Demand for Bonds, Situation Under Control"

This year, a record-high government bond issuance has been forecast, and the actual volume is expected to increase even further. This is because the opposition party is demanding a larger supplementary budget, and if a new administration takes office within the year, an additional supplementary budget may be implemented. In such cases, concerns have been raised that negative side effects such as rising interest rates and increased national debt could occur. On the other hand, some argue that the government should not miss the golden window to stimulate the economy. The government believes that, based on the current interest rate levels and demand for government bonds, the situation is better than market concerns suggest.

According to the Ministry of Economy and Finance, the National Assembly, and academic circles on January 9, attention is focused on the scale of government bonds that will increase this year as the Democratic Party of Korea, which is advocating for a supplementary budget, is demanding the issuance of deficit-financing bonds. The previous day, the Democratic Party held a meeting at the National Assembly to discuss the supplementary budget and demanded that deficit-financing bonds be issued to secure at least 20 trillion won in additional funds. Deficit-financing bonds differ from market-stabilizing bonds, which are used for maturing bond repayments; they are net issuances, issued when expenditures exceed revenues. In this case, national debt increases, and the larger the scale, the greater the fiscal burden on the country.

Lee Jae-myung, leader of the Democratic Party of Korea, is attending a meeting between related agencies to review the foreign exchange market held at the National Assembly on the 8th and posing for a commemorative photo. From the left, Yoon Ho-jung, member of the Planning and Finance Committee, Jeong Tae-ho, secretary, Jin Sung-jun, chairman of the Policy Committee, Lee Eon-ju, supreme council member, Lee Jae-myung, Choi Ji-young, director of International Economic Management at the Ministry of Strategy and Finance, Kwon Min-soo, deputy governor of the Bank of Korea, Yoon Kyung-soo, director of the International Department of the Bank of Korea, Kim Hee-jae, head of Foreign Currency Funds at the Ministry of Strategy and Finance. Photo by Kim Hyun-min

Previously, the government announced plans to issue 197.6 trillion won in government bonds this year. Of this, 80 trillion won will be deficit-financing bonds. The total government bond issuance for this year is up by 39.4 trillion won (24.7%) compared to last year, with the majority-30 trillion won-allocated to deficit-financing bonds. If the Democratic Party’s demand for a supplementary budget, which exceeds the previously expected range of 10 to 20 trillion won, is realized, the total amount of deficit-financing bonds could surpass 100 trillion won. Additionally, if the Foreign Exchange Stabilization Fund Bonds, which are to be issued up to an annual limit of 20 trillion won, are included, the total government bond issuance is expected to easily exceed 200 trillion won.

There is also the possibility that additional supplementary budgets within the year could further increase the scale of government bond issuance. Experts unanimously agree that if an early presidential election is held and a new administration takes office this year, a supplementary budget will be implemented. Bin Gibum, professor of economics at Myongji University, predicted, "The new administration will implement a supplementary budget as soon as it takes office, and preparations can be made even before it is inaugurated." He added, "The economy is already in poor shape, and the 12·3 Martial Law has further dampened the situation, so regardless of our economic fundamentals, the overall outlook is very unfavorable."

The problem is that if government bond issuance surges, the increased supply could lead to a drop in bond prices and a rise in interest rates. In this scenario, the government's interest burden would increase, and market interest rates could also rise, making it more difficult for private companies to raise funds. There is also the possibility that funds that would otherwise flow into corporate bonds could be diverted to government bonds, which are considered top-tier securities. As national debt rises, the ratio of national debt to GDP increases, leading to concerns about a potential downgrade in the country's credit rating.

Lee Cheolin, professor of economics at Seoul National University, said, "Since 2017, government spending has expanded significantly, and while tax revenue was strong under previous administrations, that is no longer the case, making the fiscal deficit a problem. Although the current administration has not increased spending as much as before, the expanded fiscal stance continues, which is like wearing clothes that do not fit." He also pointed out, "It would be more appropriate to say that, given the current difficulties, only a small amount of government bonds will be issued as part of fiscal reform, rather than continuing with the current level of spending."

Of course, some believe that urgent issues must be addressed first. Lee Jeonghee, professor of economics at Chung-Ang University, commented, "Issuing government bonds will increase national debt, but when there is no other choice, debt inevitably rises. We should not miss the golden window out of fear of debt." However, he added, "We must be prepared to assess the extent of the difficulties and where emergency funds are most needed. Given the overall uncertainty, this supplementary budget may not be the final solution, and this should be reflected in the scale of the supplementary budget."

The government believes that the situation is not as bad as some fear, citing several positive factors: strong demand for Korean government bonds due to the inclusion in the World Government Bond Index (WGBI), the fact that the market has been expecting an increase in government bond issuance since August last year, and that current interest rates already reflect this outlook. The recent net inflow of foreign investment into government bonds this month was also highlighted as a positive factor. An official from the Ministry of Economy and Finance stated, "When the amount of government bond issuance increases, it can put upward pressure on interest rates, but we will manage this well by communicating with the market."