$200 Billion U.S. Investment Fund... Impact on the Bond Market

Positive: Regular Fund Bond Issuance... Qualitative Growth in the Dollar-Denominated Bond Market
Negative: Potential National Debt... Heightened Concerns over Fiscal Soundness

At last week's South Korea-United States summit, an agreement was reached on South Korea's $350 billion investment package in the United States and the easing of U.S. tariff barriers. The investment package consists mainly of a $200 billion cash investment and $150 billion in shipbuilding cooperation. The cash investment will be carried out within an annual cap of up to $20 billion.

The government plans to use 75% of the annual $20 billion U.S. investment cap, or $15 billion, from interest and dividend income generated through the management of foreign exchange reserves. The remaining $5 billion (approximately 7 trillion won) is expected to be raised by establishing a new U.S. Investment Fund (tentative name), issuing dollar-denominated bonds with a government guarantee.

On November 5, Hana Securities stated in its report, "KP: U.S. Investment Fund as a Catalyst for Qualitative Growth," that the regular issuance of government-guaranteed fund bonds could serve as an opportunity for qualitative growth in the Korean Paper (KP) market, which consists of dollar-denominated bonds. However, it also pointed out that the potential increase in contingent liabilities, which could be converted into national debt, may raise concerns regarding fiscal soundness.

U.S. Investment Fund Bonds to Stabilize the Korean Paper (KP) Market

Currently, more than half of the KP market consists of bonds issued by policy banks and public enterprises that receive the government's "implicit" support. These bonds are typically assigned the same credit rating as the sovereign (Aa2/AA/AA-). However, because they lack an "explicit" government guarantee, their credit spreads are higher than those of Foreign Exchange Stabilization Fund Bonds (FX Stabilization Bonds). Therefore, U.S. Investment Fund bonds with a government guarantee are likely to be issued at lower credit spreads than these existing bonds.

The new government-guaranteed fund bonds, expected to be issued at an annual volume of up to $5 billion, would account for about 9% of the average KP issuance over the past three years. If the U.S. Investment Fund KP issuance materializes, it is expected to emerge as a key supplier in the KP market, alongside existing major issuers such as Korea Development Bank and Export-Import Bank of Korea.

Hana Securities analyst Ha Hyungmin stated, "Regular and predictable issuance plans over the next ten years will have a different qualitative impact on the market compared to the relatively small and irregular issuances by multiple other issuers." He added, "This characteristic suggests the emergence of a new benchmark in the KP market, following FX Stabilization Bonds, going beyond simply increasing the supply of new bonds." The supply of stable, highly liquid, top-rated assets could also attract new investors, such as conservative overseas sovereign wealth funds or central banks, which have not previously participated in the KP market.

Caution Needed Regarding External Creditworthiness

Because U.S. Investment Fund bonds will be government-guaranteed, they present a potential risk factor in terms of external creditworthiness. Although government-guaranteed debt is not directly included in national debt, it is a contingent liability that could be converted into national debt if the primary obligor defaults. If up to $5 billion in fund bonds are issued annually, it is projected that the outstanding balance of guaranteed debt could exceed 100 trillion won by the end of 2029, and the ratio of government-guaranteed debt to GDP could rise from the current 0.4-0.6% to as high as 3.2%.

Analyst Ha Hyungmin commented, "A sharp increase in government-guaranteed debt could put downward pressure on the country's credit rating." He noted, "When FX Stabilization Bonds were issued last month, Moody's explicitly cited a serious deterioration in fiscal soundness as a factor for a potential downgrade." However, he also analyzed, "Given that the government plans to cover 75% of the U.S. investment funds with foreign exchange reserve income to minimize fiscal burden, has established safeguards to adjust investment size in times of foreign exchange market instability, and that key credit rating downgrade risks such as trade uncertainty have been resolved, the likelihood of an immediate downgrade in the national credit rating appears limited."