Fitch and Moody's Praise Government Budget, Stress Need to Translate Gains into Real Productivity and Growth Rate Improvements

Praised for Improved Fiscal Balance and Stabilized Debt Ratio

Focus on Whether 'Surprise Tax Windfall' Will Drive Potential Growth

International credit rating agencies Fitch and Moody's have both issued positive assessments of the Korean government's 2027 budget proposal, stating that it strikes a balance between enhancing fiscal soundness and securing future growth engines. However, both agencies emphasized clear challenges: they cautioned that the recent surge in tax revenue may prove temporary, and underscored the need to convert the fruits of the semiconductor supercycle into productivity innovation and a genuine rebound in potential growth rates.

SK hynix semiconductor fab construction site in West Lafayette, Indiana, USA. Photo by Yonhap News.

According to the Ministry of Economy and Finance and the Ministry of Strategy and Budget on September 9, Fitch projected in its latest report that the fiscal outcomes under Korea's 2027 budget would significantly outperform initial expectations. Fitch forecast that Korea’s managed fiscal deficit would sharply decrease from 3.9% of gross domestic product (GDP) in 2026 to just 0.1% in 2027. The integrated fiscal balance was projected to achieve a surplus of 1.9% of GDP. The national debt ratio, previously projected at 51.7%, was now expected to fall considerably lower to 48.3%, indicating a decisively more stable downward trajectory than before.

Fitch particularly highlighted the buffer function of the newly established Future Response Fund. The fund is designed to absorb the volatility in fiscal revenues caused by economic fluctuations, and its structure, combined with focused investment in national strategic industries such as artificial intelligence (AI) and semiconductors, was assessed as likely to help mitigate medium- to long-term growth constraints due to aging and low birth rates.

Moody's, which released its own report on September 3, also praised the budget proposal for striking a delicate balance between fiscal prudence and securing future growth engines. Moody's pointed out that surging semiconductor demand from AI ecosystem expansion had led to a significant increase in tax revenue, greatly increasing the government's fiscal capacity. Crucially, Moody's deemed the decision to use part of the Future Response Fund to reduce the net issuance of government bonds as a highly positive factor for the country’s credit rating, since it proactively reins in leverage expansion.

Although it is rare for global credit rating agencies to simultaneously offer such praise for a government budget proposal, structural warnings were also underscored. Fitch stated that, "It is important to channel temporary increases in tax revenue into improvements in productivity and potential growth rates," and noted that if the semiconductor cycle returns to a normal trajectory, the fiscal deficit may gradually widen again. Moody's also pointed out that, in addition to the discipline needed to adjust expanded expenditures as planned, strategic industry investment must be accompanied by tangible execution that leads to genuine gains in productivity.

The government intends to leverage these positive assessments as a foundation to further strengthen its outreach efforts to major global rating agencies and foreign investors, in order to promote the soundness of the Korean economy and its medium- to long-term growth strategy.

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