Nearly 100 days have passed since President Lee Jae-myung took office on June 4. His administration has marked a notable shift in fiscal policy—from tightening to expansion. In addition to a supplementary budget for 2025, the government approved a record-high general budget for 2026 on August 29. Total government spending is set to reach KRW 728 tn in 2026, an 8.1% increase compared to this year’s initial budget. Fiscal deficit is projected to widen to 4.0% of GDP from 2.8%; government debt is expected to rise to 51.6% of GDP from 49.1%.
On the trade front, Lee’s administration has made progress in reducing tariff-related uncertainties. South Korea reached a trade agreement with the US by committing to targeted US-bound investments and increased imports from the US. In return, the US agreed to lower reciprocal and automobile tariffs to 15%. Lee’s diplomatic efforts during his first meeting with Trump on August 25 also helped bolster confidence in bilateral relations.
Domestic reforms have seen initial traction. The National Assembly passed a revision to the Commercial Act, expanding the fiduciary duties of corporate boards to protect minority shareholder interests. However, proposed tax reforms— a lower capital gains tax threshold and a higher securities transaction tax rate—have sparked controversy and public backlash.
The KOSPI has stabilized and the KRW has weakened slightly since July, following strong rallies in 2Q. The initial optimism surrounding the new administration has started to fade. Further market momentum will likely depend on actual economic data and sustained progress on reforms. The KTB yield curve has steepened notably since June. This trend is expected to persist, given the possibility of further BOK easing in 4Q and increased government bond issuance heading into 2026.
Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]Topic
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