Fitch Says South Korea’s Fiscal Deficit May Widen Again After Semiconductor Cycle Ends

Fitch Report

More Important Than a Temporary Improvement in Fiscal Metrics

Raising Underlying Growth Matters More

South Korea’s proposed 2027 budget may improve fiscal indicators, but the effect could be temporary.

That was Fitch Ratings’ assessment in a report published on September 9. The global credit-rating firm said next year’s budget of 820 trillion won ($606 billion), together with a 162 trillion won ($120 billion) future-response fund, would improve the country’s fiscal balance. But it said the favorable outlook depends heavily on how long the semiconductor supercycle lasts.

Debt Outlook Better Than Expected, but Risks Remain

In the report, Fitch said South Korea’s proposed 2027 budget would likely produce stronger fiscal results than it had originally expected. It said earnings at semiconductor companies are fueling a sharp increase in tax revenue and that the rise in revenue will probably exceed the increase in spending.

The improved tax revenue outlook should lead to a substantial improvement in fiscal performance, Fitch wrote. It estimated the government debt-to-GDP ratio at 48.3% next year, below its previous forecast of 51.7%, pointing to a more stable path than previously expected.

That view is broadly in line with the government’s 2026-2030 national fiscal management plan, released this month by the Ministry of Economy and Finance. The government said the fiscal balance would improve in every year from 2026 through 2030 despite an expansionary budget of 820 trillion won. It expects GDP growth to be the main driver. Officials are also counting on continued strength in semiconductors to lift national tax revenue and help keep medium-term public finances stable.

For example, the government projected the managed fiscal balance deficit, a key measure of the government’s underlying finances, at 0.1% of gross domestic product in 2027, 1.5% in 2028, 2.5% in 2029 and 2.9% in 2030. A managed fiscal deficit below 3% of GDP is generally regarded as a benchmark for fiscal soundness.

Government debt is projected to exceed 1,500 trillion won ($1.11 trillion) next year and rise to 1,734.1 trillion won ($1.28 trillion) by 2030. Even so, the debt-to-GDP ratio is expected to edge up only from 48.3% to 49% over that period. When the government released its 2025-2029 fiscal management plan in August 2025, it projected the 2029 debt-to-GDP ratio at as high as 58%. After reflecting stronger GDP and tax revenue tied to the semiconductor cycle, that forecast was lowered by about 10 percentage points in a year.

Fiscal Improvement Hinges on the Semiconductor and AI Cycle

The key question is how long the chip boom can last. Fitch highlighted that risk.

“The current favorable fiscal outlook depends heavily on how long the ongoing AI- and semiconductor-related earnings cycle can be sustained,” Fitch said. The government’s revenue forecast also rests on the assumption that strong corporate profitability will continue.

It added that the concentration of revenue gains in a limited number of industries, particularly semiconductors, shows that stronger fiscal performance could prove temporary if earnings growth slows.

Over the medium to long term, Fitch said the effect on sovereign creditworthiness will depend less on a short-term improvement in fiscal metrics than on whether the increase in government spending next year can actually raise South Korea’s growth potential.

“Once the current semiconductor-driven surge in tax revenue fades and revenue growth normalizes, the fiscal deficit will gradually widen again,” Fitch said. “From a sovereign credit perspective, the key question is how effectively the temporary rise in AI- and semiconductor-related tax revenue can be turned into investment that lifts medium-term economic growth.”

Fitch maintained South Korea’s sovereign credit rating at its current level this year. In January, it affirmed the rating at AA- with a stable outlook. South Korea has held the same rating for 14 years since it was upgraded to AA- in September 2012.

The government said it would continue to explain its fiscal policy and medium- to long-term growth strategy to major credit-rating firms and global investors.

Nam Jung-min, Hankyung.com reporter peux@hankyung.com