Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Korean bond market at crossroads ahead of 2025 supplementary budget
Acting President and Finance Minister Choi Sang-mok speaks during a National Security Council meeting at Government Complex in Seoul, Friday, following the National Assembly's impeachment of former acting President Han Duck-soo. Yonhap
By Lee Yeon-woo
Korea's bond market has remained stable, even in the aftermath of a brief imposition of martial law that rattled other exchanges, leading to a sharp weakening of the won against the U.S. dollar and increased volatility in the domestic stock market.
However, with projections indicating an inevitable supplementary budget next year, concerns are growing over the potential spillover of economic uncertainties into the bond market.
"Currently, the bond market's focus is on the supplementary budget," Eugene Securities analyst Kim Ji-na said. "Next year's supplementary budget is expected to further strain the supply of long-term bonds."
The amount of government bond issuance anticipated next year already reached a record-high of 197.6 trillion won. In addition, the government plans to issue up to 20 trillion won in won-denominated foreign exchange stabilization bonds to bolster external credibility and stabilize the currency market.
As a significant portion of the supplementary budget will be financed through government bond issuance, this additional supply is expected to place further pressure on the bond market. The increase in government bond issuance could drive up bond yields, raising borrowing costs for businesses and households in need of essential funds.
Kim noted that while a supplementary budget itself is not unprecedented and would not surprise the market, the key issues are the amount and the timing of its implementation.
"The upcoming supplementary budget could exceed 10 trillion won, driven by the political imperative of stabilizing livelihoods and the need to defend against economic growth falling below 1 percent. Depending on the next ruling party, it may not be limited to a single round," Kim said.
Calls for a supplementary budget in 2025 gained momentum as the country's economy continues to struggle. Some indicators, including the won weakening to the 1,480 level against the dollar, are reminiscent of the global financial crisis of 2008. The finance ministry is projecting just 1 percent economic growth next year.
The finance ministry has officially opposed a supplementary budget, citing concerns over fiscal sustainability. Instead, it plans to front-load 75 percent of the total budget, or 431 trillion won, in the first half of next year.
"I agree with the perception that the government needs to take an active role given the struggles of the public and uncertainties both at home and abroad," acting President and Finance Minister Choi Sang-mok said at a press meeting, Dec. 23. "However, the current budget must be executed first, so I will prioritize its execution."
Many experts believe a super supplementary budget worth tens of trillions of won will ultimately be implemented to support the sluggish economy.
"Given the domestic economic uncertainties and external tariff risks, a supplementary budget amounting to 1.1 percent of gross domestic product will be necessary to ease fiscal shortages in 2025," Citi Korea Chief Economist Kim Jin-wook said.
"We expect 10 to 15 trillion won to be allocated in the first quarter of next year, with an additional 15 to 20 trillion won following a presidential election in the second half of next year."