The Lee Jae-myung administration is drawing attention from both domestic and international financial markets regarding the National Fiscal Management Plan it is set to unveil early next month. This plan will include revenue and expenditure plans for the next five years, as well as projections for the fiscal balance, serving as a benchmark to gauge the fiscal management direction during Lee Jae-myung's term. The Bank of Korea is also keeping a close watch on it as it is a key indicator that will have a direct impact on the scale of government bond issuance and interest rates.
According to the Ministry of Economy and Finance on the 19th, Moody's, an international credit rating agency, recently focused its inquiries on Korea's medium- to long-term fiscal capacity during a meeting with Deputy Prime Minister and Minister of Economy and Finance Ku Yun-cheol. Moody's assessed that "Korea's fiscal costs and liability burden are manageable compared to major advanced countries," but also expressed interest in the impact of demographic changes, such as aging, on medium- to long-term fiscal capacity.
Other global credit rating agencies are also closely monitoring Korea's medium-term fiscal outlook. In April, Jeremy Zook, the Asia-Pacific director of Fitch, who held a press conference during his visit to Korea, remarked in response to a question regarding the impact of the first and second supplementary budgets on the national credit rating that "the medium-term fiscal policy trajectory is a more significant consideration than the supplementary budgets," emphasizing the importance of the long-term direction of fiscal policy over short-term stimulus measures.
In fact, there have been several instances overseas where changes in medium-term fiscal outlooks have led to rating adjustments. For example, Moody's lowered the credit rating of the United States by one notch (AAA→Aa1) in May due to concerns over widening fiscal deficits, while S&P downgraded France's credit rating at the end of last year (Aa2→Aa3) due to sluggish tax revenues and fiscal uncertainties. Fitch also downgraded China's credit rating (A+→A) in April due to a deteriorating fiscal outlook.
Particularly, this plan has garnered increased attention as it discloses the overarching framework for fiscal management within the Lee Jae-myung administration's term for the first time. The National Fiscal Management Plan outlines key indicators such as revenue and expenditure forecasts, government debt ratio, and consolidated fiscal balance without social security fund, allowing for an assessment of the pace of debt increase and fiscal sustainability. Moody's, Standard & Poor's (S&P), and Fitch, which determine Korea's national credit rating, are expected to update their evaluations of fiscal soundness based on this plan.
Kim Sung-soo, a senior researcher at Hanwha Investment & Securities, noted that "the National Fiscal Management Plan will provide insight into the direction of fiscal management during the five-year term of the Lee Jae-myung administration," adding, "There are many in the ruling party who prefer expansionary fiscal policy, raising concerns that the Lee Jae-myung administration may engage in excessive fiscal spending, attracting even more attention." He further stated, "If the total expenditure growth rate exceeds an average of 6% compared to the previous year, it will be necessary to watch closely."
Bond market investors are also exhibiting a cautious stance as they await government announcements. The revenue and expenditure plans could impact the scale of government bond issuance. According to a Ministry of Economy and Finance announcement made earlier in May, this year's government bond issuance limit is set at 207.1 trillion won. This represents a 31.3% increase compared to last year (157.7 trillion won), marking the largest scale ever. If medium-term expenditures rise, leading to an increase in government bond issuance, upward pressure on market interest rates could intensify, expanding uncertainty in the bond market.
According to the Bank of Korea, last month saw a net inflow of $2.4 billion in foreign bond investor funds. This marked six consecutive months of net inflows since February ($3.54 billion), but the scale of inflows sharply decreased after peaking in May ($7.83 billion). The buying momentum, which had been active since Korea's inclusion in the World Government Bond Index (WGBI) last year, seems to have somewhat slowed since the new government was formed.
The Bank of Korea plans to closely monitor this plan and prepare countermeasures. During a Monetary Policy Committee meeting held on the 10th of last month, a Bank of Korea official said, "As the secondary supplementary budget issue is wrapped up, investor interest is likely to shift to next year's budget and the medium-term fiscal management plan," adding that "if the contents of the plan highlight the possibility of expanded government bond issuance, upward pressure on interest rates could increase."