Korea budget proposal:Marginally expansionary

Economics: The Ministry of Strategy and Finance (MoSF) released its 2018 budgetproposal, which looks to increase spending by 4.6% y-o-y to KRW429trn. The fiscalpolicy stance has turned moderately more expansionary than in previous years,although spending details suggest the growth impulse could be less than what theheadline indicates. Tax collection is to exceed budget expectations in 2017, whichshould provide a buffer for any shortfall in fiscal revenues next year. However, withfiscal policy turning slightly more expansionary in the medium term, the fiscalbalance, excluding contribution from social security funds, is likely to record a largerdeficit in the coming years, with risks tilted to the downside, in our view.

    Rates: Based on the 2018 budget, the MoSF will issue KRW106.6trn of KoreaTreasury bonds (KTBs) in 2018 (Bloomberg, 29 August 2017), only 2.8% more thanthe planned issuance of KRW103.7trn in 2017. Net issuance is expected to bereduced marginally, to KRW37trn in 2018 from KRW37.6trn in 2017. There arelimited implications for the bond market from this budget announcement. While asupplementary budget is possible in 2018, it is too early for market participants toprice in the likelihood of additional KTB issuance.