Economic boost: Pedestrians walking in the streets of Seoul as snow falls. — Bloomberg
Seoul: South Korea’s bid to tackle a slowing economy via fiscal stimulus will pressure the won and may steepen the yield curve at a time when the bond market is already absorbing a record amount of issuance.
Faced with potential US tariffs and fallout from its brush with martial law, the country is looking at stimulus to help the economy.
The opposition party, which holds a majority of seats in Parliament, recently proposed an outlay of 35 trillion won or about US$24.3bil – and there have been suggestions to sell more debt to help fund the expenditure.
Any additional supply stands to drive up bond yields and steepen the curve, according to analysts. The actual amount is likely to be determined in the coming weeks.
The “supplementary budget is equities-positive but comes at the expense of foreign exchange, as typically a widening deficit tends to weigh on the currency market”, said BNY strategist Wee Khoon Chong.
As far as government bonds, the yield curve for securities in the two-year to five-year range is “likely to go steeper, with both supply pressure and front-end lower” amid expectations the Bank of Korea (BoK) will cut interest rates at its next meeting, he said.
Now-impeached President Yoon Suk Yeol triggered the worst political crisis in decades by briefly imposing martial law on Dec 3.
The resulting chaos battered consumer confidence, adding to currency headwinds – South Korea’s won has been the worst-performing currency in Asia over the past six months, losing 7% versus the greenback.
The country has one of the largest trade surpluses against the United States, making it particularly vulnerable to American trade policy changes.
The BoK last month cut its forecast for gross domestic product growth.
All that has brought discussion of fiscal stimulus to the fore.
BoK governor Rhee Chang-yong has suggested a supplementary budget of between 15 trillion won and 20 trillion won.
The 35 trillion won figure, proposed by the opposition Democratic Party, is likely too contentious, according to Kim Myoung-sil, an analyst at iM Securities Co.
But if the fiscal outlay really does prove that large, “the market will be shocked and the yield on government bonds will spike”, she said.
Both the scale and timing of any infusion to boost the economy would be key for market reaction, according to Daishin Securities Co.
“With an extra budget, curve steepening is natural for long-term supply,” said Kong Dongrak, an analyst at Daishin.
“A 25 trillion won extra budget would not be as sensitive, but a 30 trillion won budget would weigh on the bond market.” — Bloomberg
