Deutsche Bank-Asia Macro Strategy Notes KRW Takeaways from the 2026 fisc...-117570060

T2se3r0Ot6kwoPaT2se3r0Ot6kwoPaDistributed on: 01/09/2025 08:07:49 GMTDistributed on: 01/09/2025 08:07:49 GMTDeutsche Bank Research Deutsche Bank AG/Hong Kong IMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS. Fixed Income Asia Macro Strategy Notes Date 1 September 2025 KRW: Takeaways from the 2026 fiscal budget Last week, the Korean government announced its 2026 budget. Below we outline a few key takeaways. A more expansionary fiscal policy compared to the prior administration. In line with the recent comments by the President that fiscal policy must play a more active role in supporting growth, the Korean government has announced a managed fiscal deficit target of 4.0% of GDP for 2026. This figure, which represents the consolidated fiscal deficit minus the social/public fund surplus, exceeds the 3% of GDP fiscal rule. While slightly below the 4.2% projected deficit for 2025 (including the two extra budgets), this marks a clear shift in the government’s fiscal policy stance when compared to the 2.9% of GDP originally planned for this year by the Yoon Suk Yeol administration in 2024. According to the current projection, the government expects the managed fiscal deficit to remain in a range of 4.1-4.4% of GDP over the next four years, indicating a sustained move towards expansionary fiscal policy. This would result in the debt/GDP ratio rising from 51.6% in 2026 to 58% by 2029. (Figure 1 & Figure 2) Figure 1: 2026 and beyond fiscal projections Source: Deutsche Bank, MOEF Restructuring the economy. Fiscal expenditure is expected to increase 3.5% YoY in 2026 to KRW728tn, below the five-year average of 5.4% and 7.1% in 2025. The government's spending plans continue to prioritize health/social welfare and national defence. However, due to rising trade barriers and an increasingly more competitive AI landscape in Asia, the government is also looking to restructure the economy, with a significant increase in spending growth planned in R&D and industry restructuring/transition. According to the budget proposal, the government has allocated KRW10.1tn to AI development, marking a substantial increase from the KRW3.3tn in 2025 (Figure 3). Another KRW44.3tn is earmarked to support R&D and foster new industries. KTB issuance to be similar to 2026. Given the sizeable fiscal deficit, gross KTB issuance is expected to reach KRW231.7tn in 2026, close to the KRW235.1tn of 2025, and would represent the second-largest gross issuance on record. On a net basis, 2026 issuance is expected to reach KRW115.7tn, again similar to 2025 Perry Kojodjojo Strategist +852-2203-6153 1 September 2025 Asia Macro Strategy Notes Deutsche Bank AG/Hong Kong Page 2 (KRW117.6tn) and the second-largest net issuance on record (Figure 4). In terms of issuance tenor, just as in previous years, the government is likely t