Korean govt debt financing cost at 8-yr high of 3%, to go higher on rising rates

South Korean government¡¯s average borrowing cost at home has topped 3 percent for the first time in eight years in April, and further rise in financing cost from faster rises in interest rates would worsen fiscal balance amid widening deficit from loose fiscal spending.

According to a financial trends report released by the Ministry of Economy and Finance Thursday, Korean treasury bonds offered in maturities from 1 to 50 years on average yielded 3.15 percent in April, the first time the monthly average hit above 3 percent since June 2014. The average borrowing cost is nearly 100 basis points higher from 2.18 percent six months ago.

The government bond yield has been flattening around 3 percent amid signs of slowing economy, fast rise in inflation, faster rate hikes to match the U.S. tightening, and supply glut from widening fiscal deficit and spending.

Debt financing cost is likely to jump this year from annual 20 trillion won level ($15.8 billion) over the last three years as the base rate is expected to go above 2 percent to contain inflation expected to average over 4 percent this year.

Bond issuance has nearly doubled from 97.5 trillion won in 2014 to 180.5 trillion won in 2021. The government plans to issue 177.3 trillion won in bonds this year.

In April alone, the government issued 18.9 trillion won in treasury bonds, and outstanding balance reached 904.3 trillion won.

Debt financing has been manageable so far due to still-strong foreign demand and tax revenue excess. But any change could burden the government already in fiscal deficit of 33.1 trillion won as of March. Yet, the government under new President Yoon Suk-yeol is seeking record 60 trillion won supplementary budget.

Foreigners continued their net inflow for a 37th straight month, resulting to record outstanding balance of 174.8 trillion won as of end of April.

In the first quarter, tax revenue increased 22.6 trillion won on year to 111.1 trillion won. The government collected 31.1 trillion won in corporate taxes, up 10.9 trillion won from a year ago. Income tax also gained 6.7 trillion won to 35.3 trillion won and value-added tax 4.5 trillion won to 22.1 trillion won.

The government¡¯s total income reached 170.4 trillion won in the January-March period. Spending was higher at 203.5 trillion won, resulting to a fiscal deficit of 33.1 trillion won.

[¨Ï Maeil Business Newspaper & mk.co.kr, All rights reserved]