SEOUL, May 12 (AJP) — President Lee Jae Myung on Tuesday openly challenged the long-held policy rationale for fiscal tightening to rein in South Korea’s highly leveraged economy, signaling a more expansionary fiscal stance for the second half of this year and 2026 as growth concerns deepen amid prolonged Middle East tensions.
“This is a time for investment to bolster growth potential,” Lee said during an emergency cabinet meeting, ordering the government to draft an “aggressive fiscal” strategy in next year’s budget and the supplementary spending plans for the second half.
Lee defended proactive government spending, arguing that stimulus coupons distributed last year generated additional consumption of roughly 430,000 won ($310) per recipient, which he said demonstrated that fiscal support can meaningfully revive the economy.
He also pushed back against concerns over the country’s debt burden, claiming South Korea’s actual government debt level remained only around 10 percent of gross domestic product.
The remark appeared to reference an International Monetary Fund calculation that estimated South Korea’s net debt at 10.3 percent of GDP. However, the IMF figure excludes substantial liabilities such as pension obligations and debt held by state-run enterprises.
According to the Ministry of Economy and Finance, South Korea’s broader national debt measure, known as D1 and encompassing both central and local government debt, recently stood at around 49 percent of GDP. Public sector debt, or D3 — which also includes non-financial public institutions — is estimated at roughly 68 percent.
Markets interpreted Lee’s comments as a clear signal of fiscal expansion as the government braces for slowing growth and mounting uncertainties from the prolonged conflict in the Middle East.
Bond yields, already revisiting levels last seen during the 2023 tightening cycle, rose further on expectations of increased debt issuance tied to fiscal expansion.
The benchmark three-year government bond yield climbed 4.6 basis points to 3.644 percent on Tuesday, while the 10-year yield rose 5.2 basis points to 4.002 percent — returning to levels seen in November 2023, when the Bank of Korea’s policy rate stood at 3.5 percent during the height of post-pandemic inflation fighting.
Liquidity conditions, however, remain ample.
According to the Bank of Korea, the growth rate of broad money supply, or M2, recently expanded about 4.9 percent from a year earlier, relatively elevated compared with other major economies such as the United States and Japan.
At the same time, the money multiplier under the revised M2 standard stood at 13.56 as of February, well below levels above 20 seen before the 2008 global financial crisis. The money multiplier — calculated by dividing M2 by the monetary base — measures how effectively central bank liquidity circulates through the economy via deposits and lending.
The figures suggest liquidity itself may not be the core problem, but rather weak transmission into actual consumption and investment.
Some economists argue that improving the distribution and circulation of capital through structural reforms and targeted policy measures may be more effective than relying solely on debt-financed fiscal expansion.
The Bank of Korea is scheduled to release its March money supply data on Wednesday.
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