(Bloomberg) — South Korea’s government plans to issue 11.3 trillion won ($9.5 billion) in bonds to fund an extra budget aimed at helping small businesses hit by virus curbs ahead of a looming presidential election.
The extra budget will total 14 trillion won, of which 11.5 trillion won will be used to support self-employed small enterprises, according to a statement from the finance ministry Friday.
The latest additional spending plan further underlines the government’s efforts to keep the economy’s recovery on track even as the central bank hikes interest rates and Korea’s debt load rises. The nation’s debt dropped to its weakest level in more than three years this week as calls for a bigger extra budget stoked fears of additional bond supply.
“The extra budget plan this time is focused on supplementing the cost incurred from the unexpected quarantine situation we are facing currently,” said Finance Minister Hong Nam-ki during a briefing on Friday. “The bill has put into consideration the inevitable situation of having to issue more bonds, along with impacts on inflation and the bond market, hence I ask the parliament to respect the size and purpose of the extra budget plan as much as possible,” he said.
Still, even before the announcement of the plans, the two leading candidates vying to succeed President Moon Jae-in said a budget around the 14 trillion won mark would be too small to offer businesses the support they need.
Ruling Democratic Party presidential candidate Lee Jae-myung said last Friday that he would draw up another extra budget right after the election in March if the government didn’t increase the scale of its extra spending plans, provided he wins the poll.
The nation’s benchmark three-year bond yield surged to 2.18% this week, the highest since June 2018, following the remarks by the presidential front runners. Their comments boosted fears the government will supply more bonds this year. The government had earlier planned up to 166 trillion won of bond issuance this year.
Read More: Rout in South Korean Bonds Deepens on Calls to Boost Spending
While the economy has so far made a solid enough recovery to enable the BOK to back away from its emergency pandemic settings, the extra spending plans aim to lessen the impact of recent virus restrictions and ensure the nation is better prepared to deal with the ongoing omicron wave.
Korea tightened virus restrictions twice in December just after easing them the previous month, as infections surged to record levels amid the spread of the variant. It has since extended the tighter curbs twice in January, while easing the limit on private gatherings.
Part of the spending will be allocated to securing 25,000 more hospital beds, and 500,000 additional Covid treatment pills and shots, while 1 trillion won will be reserved in case omicron spreads further.
Vice Finance Minister Ahn Do-geol on Friday reiterated the ministry will try to minimize the impact of the new debt sales by distributing them evenly throughout the year. The government will take all available steps if excessive volatility is seen in bond the market, he added.
Still, the outlook for the bond market remains clouded by uncertainties ahead of the presidential election on March 9, and the end of Bank of Korea Governor Lee Ju-yeol’s term on March 31.
Hawkish rhetoric by both the Federal Reserve and the BOK amid growing concerns over inflation have also weighed on the nation’s debt, pushing up yields.
The ministry will submit the budget proposal to lawmakers on Monday. If approved, the issuance will raise the government’s debt ratio to 50.1% of Korea’s gross domestic product, up from 50% based on the initial annual spending plan.
(Updates with bond market details in the third paragraph, finance ministry officials’ comments in fourth and 13th paragraphs.)
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