Domestic Bond Market Expected to See Mixed Signals
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
2023 national budget & KTB issuance outlook seen positive for bonds
The market's focus is now shifting to the size of next year’s national budget and limit on KTB issuance with the Yoon administration due to submit its budget proposal for 2023 to the National Assembly by September 2. Reports have surfaced that the government is planning to propose a budget of roughly KRW640tr for 2023, marking a 5.3% increase compared to the original budget set for 2022 but an over-KRW30tr decline vs. this year's total expenditure of KRW679.5tr including the two supplementary budgets. With the budget proposal set to reflect the Yoon administration’s strong focus on fiscal soundness, we believe the 2023 budget will be in the range of KRW640-650tr with annual growth expected to be lower than the 8.7% average of the previous Moon administration and higher than the 3.5% average of the former Park administration.
Key points to watch for in the 2023 budget proposal include the discretionary spending portion and the government revenue outlook, which are linked to economic trends and the KTB issuance limit of the year. With a 10% reduction in discretionary spending stated in budget planning guidelines, a sharp increase in the discretionary portion is unlikely for 2023. Instead, the government is expected to trim the budgets of unessential projects, such as the Korean New Deal (roughly KRW33tr), local currency subsidies (KRW 0.6tr) and government-supported job creation (KRW 3tr), and redirect the funds to other areas to prevent a drop in its contribution to growth and support the uptrend.
The government's revenue projection is another important point to focus on in the 2023 budget proposal. Based on expectations for over-2% economic growth, the Yoon administration is highly likely to set its tax revenue (accounts for more than 60% of total revenue) outlook for 2023 above the KRW396tr suggested in the second supplementary budget. However, corporate and capital gains taxes are expected to fall, limiting the increase in tax revenue. As a result, the outlook for total revenue growth should fall short of the 5-6% growth in total expenditure projected for 2023. This week, we expect to see mixed signals in the domestic bond market, with 3Y KTB yields to move within 3.12-3.25% and 10Y KTB yields within 3.20-3.35%. The 3Y-10Y yield spread should move within 8-13bp.