Interest Rates Soar... National Debt Surpasses 1000 Trillion Won

Financial Trends

[Asia Economy Sejong=Reporter Son Seon-hee] National debt surpassed 1,000 trillion won for the first time as of the end of April. While major countries around the world are accelerating tightening measures, such as the U.S. Federal Reserve's unprecedented interest rate hike after 28 years, the excessively swollen national debt is considered another ticking time bomb for the Korean economy.

According to the "Monthly Fiscal Trends June Issue" released by the Ministry of Economy and Finance on the 16th, the national debt (central government basis) balance as of the end of April was recorded at 1,001 trillion won. This is an increase of 19.1 trillion won compared to the end of March (981.9 trillion won) one month earlier. This is the first time the national debt has exceeded 1,000 trillion won. The government projected that the national debt would reach 1,068.8 trillion won by the end of this year during the second supplementary budget formulation last month. However, this figure also includes approximately 31 trillion won of local government debt.

The integrated fiscal balance (total revenue - total expenditure) showed a deficit of 21.3 trillion won. Excluding funds, the managed fiscal balance, which reflects the actual state of national finances, recorded a deficit of 37.9 trillion won. The Ministry of Economy and Finance stated, "We plan to strengthen monitoring of future national debt and fiscal balance trends and continue fiscal innovation efforts to enhance fiscal sustainability, including the introduction of fiscal rules."

Tensions are also rising in the government bond market. The average procurement interest rate of government bonds, which has shown a steady upward trend every month this year, is expected to break into the 4% range soon as the increase widened after the Fed's 'Giant Step' (a 0.75 percentage point hike in the base interest rate).

The average monthly government bond procurement interest rate last month was 3.18%. It has been continuously rising from January (2.31%), February (2.52%), March (2.61%), and April (3.15%). As of the end of last month, the outstanding amount of government bonds issued was 921.9 trillion won.

Despite the Bank of Korea's base interest rate hike last month, government bond yields remained at similar levels to the previous month, largely due to the announcement of a 7.5 trillion won government bond repayment plan through the second supplementary budget. The announcement to reduce government bond issuance from around 18 trillion won monthly until May to 12 trillion won in June also improved supply and demand conditions. The government bond bid rate last month was 287%, slightly up from 254% the previous month.

However, this is only a temporary effect due to the supplementary budget, and the government's funding burden is expected to increase with future base interest rate hikes. On the morning of the day immediately after the Fed's Giant Step, the 3-year government bond yield was 3.55% (as of 10 a.m.), and the 10-year yield was 3.70%, continuously hitting new highs and reaching the highest levels in the past 10 years. If this trend continues, the average procurement interest rate of government bonds could exceed 4% in the second half of this year.

The Ministry of Economy and Finance also expressed caution, stating, "Government bond yields continue to be volatile due to inflation concerns and domestic and international monetary tightening vigilance." The government set the annual average government bond procurement interest rate at 2.61% in this year's budget and allocated interest expenses accordingly, but if interest rates rise sharply in the future, it may need to urgently secure additional interest budget.

Meanwhile, as of the end of April, national tax revenue totaled 167.9 trillion won (cumulative), an increase of 34.5 trillion won compared to the same period last year. The progress rate was 42.3%. Corporate tax revenue increased by 21.4 trillion won compared to last year due to improved corporate performance, reaching a progress rate of 49.4%. Value-added tax also increased by 5.3 trillion won due to consumption recovery combined with rising prices, recording a progress rate of 50.1%, the highest among all tax categories.

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