[The Editors' Verdict] The Pandemic Crisis Could Be an Opportunity for Korean Government Bonds to Gain Recognition

Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University

The current account surplus trend that has continued for nearly four and a half decades since the foreign exchange crisis is a decisive factor in the country gradually losing vitality and entering low growth, as investment has not reached the level of national savings surplus, which was the growth engine. Instead, the surplus has led to stability in the external sector. The sovereign credit rating, which indicates the creditworthiness of foreign currency-denominated government bonds and once fell to the level of the Philippines, is now higher than that of China and Japan, comparable to France and Belgium, and some international credit rating agencies even rate it higher than the United Kingdom.

The credit default swap (CDS) premium, which compensates when government bonds default, is only slightly higher than Japan and Ireland, which are rated lower than us, and is actually lower than Canada. By the end of 2019, among foreigners holding 16% of issued government bonds, the central bank's share was high, and it is known that many advanced countries' central banks were included.

Despite the trend of credit rating downgrades in many countries, the reason our government bonds maintain a high status is the net external assets, which reached 30% of GDP after external assets surpassed liabilities in 2014. Although national debt is rapidly increasing, the low ratio of national debt to GDP among major advanced countries remains a strength. According to the June International Monetary Fund (IMF) World Economic Outlook, Korea (53.4%) had the lowest ratio in 2021, followed by Australia (64.3%).

Government bonds are representative safe assets. Cash is also a safe asset, but government bonds have the advantage of being reusable. The repurchase agreement (RP) market, where transactions occur using government bonds as collateral, is a core financial pipeline in advanced financial markets. Moreover, government bond yields are key indicators that move financial and foreign exchange markets. In Korea, the RP market emerged as an important funding market after the call market was reorganized to be bank-centered in 2013. Measures such as changing interest income tax to a holding period tax were taken to revitalize the RP market and enhance international consistency.

However, despite the high international status, it is unfortunate that government bonds are not properly utilized in the international financial market. The reason is that our government bonds are not eligible collateral. They are not ineligible due to lack of qualification but because they are not connected to the global financial pipeline. As a result, domestic companies or financial institutions expanding overseas cannot raise funds cheaply using our government bonds as collateral. In the Asian region, Japanese government bonds and Hong Kong government bonds are recognized as eligible collateral.

Currently, while U.S. Treasury yields are rising, the dollar is showing a declining trend. This is because the market expects the incoming Democratic government to cover the economic losses caused by the Republican government's pandemic crisis with a massive amount of government bonds. If this forecast is correct, the value of U.S. Treasuries, which will fall, will challenge their unique status as a safe asset in the global economy.

Currently, China has taken the lead in this competition. The Chinese government has made relentless efforts to increase international investors' access to government bonds. A recent example is the issuance of negative-yield euro-denominated bonds by the Chinese government.

The foreign exchange crisis became an opportunity for the government bond market to grow significantly. The unprecedented scale of government bond issuance due to public fund injections and efforts to create a smoothly circulating government bond market developed it into the second most advanced market in Asia after Japan. The pandemic crisis can be another opportunity for Korean government bonds to be recognized as safe assets overseas. When our government bonds become eligible collateral and connect to the global financial pipeline, Korea will secure a powerful foreign currency funding channel and effectively enter the core of the global economy.

Kyungsoo Kim, Professor Emeritus, Sungkyunkwan University

This content was produced with the assistance of AI translation services.