South Korea Plans Up to 222.8 Trillion Won in 2027 Bond Issuance

South Korea's government bond issuance for 2027 is now expected to be as high as 222.8 trillion won, a substantial increase from earlier forecasts. This upward revision by Barclays, for instance, raises its estimate from 185.6 trillion won to 221.5 trillion won. This shift is primarily attributed to the government's decision to allocate excess tax revenue, particularly from the AI boom, to a newly established Future Response Fund rather than using it for debt repayment or the general account. This necessitates higher bond issuance to cover general account deficits and increasing expenditures.

The Ministry of Economy and Finance's detailed plans for the Future Response Fund have dampened market expectations for a reduction in next year's treasury bond issuance. While some analysts initially anticipated a decrease, the government has signaled that new variables, such as the Future Response Fund, suggest that earlier forecasts for issuance reduction may need to be lowered. This fund is intended to manage and invest surplus tax revenues, with a stated goal of achieving returns in the high 3% range, similar to 1-3 year short-term treasury bond yields.

Economists have reacted to these developments with revised forecasts. Citi economist Kim Jin-wook, for example, raised his 2027 treasury bond issuance forecast by 13 trillion won to 211 trillion won, citing an expected 12% year-on-year increase in total expenditure to approximately 820 trillion won, with about 40 trillion won from the Future Response Fund. State Street Markets researcher Choi Ji-wook also projects issuance around 210-215 trillion won for next year. However, there are nuances: if the Future Response Fund were to lend directly to the Public Fund Management Fund or repay existing treasury bonds, or if it purchased short-term bonds and money market funds, it could alleviate the burden of new issuance and potentially reduce the average duration of issued volumes, easing market stress. Nevertheless, the prevailing sentiment is an upward adjustment to issuance expectations.