South Korea Plans Record 2021 Bond Sales to Fund Stimulus

Photographer: Jean Chung/Bloomberg

South Korea is gearing up for another year of record bond issuance as the government prepares to boost its budget by 8.5% in 2021, raising questions over the ability of markets to absorb the sales. Korean yields jumped higher.

The finance ministry will issue as much as 172.9 trillion won ($145.6 billion) of sovereign debt in 2021, based on its budget proposal, according to An Il-whan, the second vice minister of the finance ministry.

This would eclipse the 167 trillion won planned for 2020, which came as the impact of the coronavirus forced policy makers to compile three supplementary budgets. The expected sales next year will increase expectations for the Bank of Korea, which has refrained from massive debt purchases embarked on by peers, to step up measures to prevent bond yields from surging.

“Market consensus was that next year’s issuance would be similar to this year’s 167 trillion won — in that regard, the size isn’t small,” said Kim Sanghoon, a fixed-income strategist at KB Securities Co. “The rise in bond yields may ease once markets digest the budget plan, but if that is not the case, there would be an inevitable need for the central bank to step in.”

The deluge of supply coming to market was evident in rising yields seen in August, which gathered pace last week when Governor Lee Ju-yeol damped hopes of the central bank stepping up purchases anytime soon.

The advance was fueled Tuesday also after the newly-elected head of the ruling Democratic Party, Lee Nak-yon, said the party and government were discussing a fourth extra budget for 2020. The yield of the nation’s 10-year bond rose for a sixth day, gaining seven basis points to 1.59%.

“There is ample possibility for the BOK to step in to cap bond yields from rising further,” said Kim Jina, a fixed-income analyst at IBK Securities Co. “But given that the central bank made a move to buy 1.5 trillion won of bonds just last Friday, their next action might take a while, possibly after details of the fourth extra budget are revealed,” she said.

The government has drafted a 555.8 trillion won budget bill for the new year, which is 8.9 trillion won more than this year’s spending plan including the three stimulus packages to combat the pandemic.

The government will submit its budget bill to parliament on Thursday. The final size of the budget and bond sales will be released after approval from lawmakers, which is expected later this year.

Here are more details on South Korea’s 2021 budget and bond issuance plans:

• Of the total amount of bond issuance planned for 2021, 63.2t won would be used to repay maturing debt, bringing net new issuance to 109.7t won
• As much as 89.7t won would be issued as deficit-financing debt
• Up to $1.5b would be foreign-exchange stabilization bonds
• The 555.8t won budget is set to push government debt to 46.7% of gross domestic product, a record ratio
• That is expected to continue setting new highs in the years ahead to reach 58.3% by end-2024

— With assistance by Whanwoong Choi

(Adds analyst comments, updsted prices, and details of extra budget)