S&P Maintains US Credit Rating at ‘AA+’ as Tariff Revenues Balance Fiscal Risks

Economic

Summary:

S&P Global affirmed the US sovereign rating at ‘AA+’ with a stable outlook, noting that tariff revenues under President Trump’s trade policies could help offset the fiscal impact of his expansive tax and spending package....

Stable rating despite fiscal pressures

S&P Global confirmed the United States’ long-term credit rating at ‘AA+’, underscoring that while the fiscal profile remains a structural weakness, the immediate risks are contained. The agency highlighted that President Trump’s newly enacted “One Big Beautiful Bill Act” a combination of tax cuts and increased government spending is deficit-expanding in nature. However, the causal factor mitigating this concern is the administration’s tariff regime, which has generated meaningful revenue to counterbalance part of the fiscal shortfall.

According to S&P, tariff income provides the government with a short-term buffer against rising deficits. The causal link is straightforward: higher import duties increase government revenue, which partially offsets the spending-driven expansion of the deficit. Still, the reliance on trade tariffs introduces potential volatility since revenue depends on global trade flows and the resilience of import volumes amid tariff-induced costs.

Outlook remains stable

While S&P acknowledged that the US fiscal profile is its key weakness, the stable outlook suggests confidence that the world’s largest economy retains strong institutional capacity, monetary flexibility, and deep capital markets to absorb fiscal pressures. The affirmation signals that near-term risks, including the impact of expanded spending, remain balanced by tariff revenues and the US dollar’s status as the global reserve currency.

The S&P decision reflects a cautious equilibrium: the US continues to face long-term fiscal vulnerabilities, but tariff revenues and institutional strengths are sufficient to maintain its current rating. The sustainability of this approach, however, depends on whether tariff inflows can persist without undermining trade relationships and economic growth in the longer term.

Source: Reuters

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Economic

FDI as the backbone of modernization

Vietnam’s journey with foreign direct investment began early, with the first Foreign Investment Ordinance in 1977 and the landmark 1987 Foreign Investment Law, which marked a decisive shift toward market-oriented reforms. Successive legal revisions, coupled with WTO accession in 2007 and participation in multiple free trade agreements, steadily improved Vietnam’s investment climate.

FDI inflows have consistently fueled industrialization, bringing advanced technology, managerial know-how, and access to global markets. In 2024, disbursed FDI reached a record $25.35 billion. Major global corporations such as Samsung, Intel, LG, and Foxconn expanded their operations in Vietnam, reinforcing the country’s position as a strategic hub in electronics, high technology, and global supply chains. These investments illustrate a direct causal link: legal reforms and trade openness attracted capital, which in turn accelerated Vietnam’s modernization.

OFDI: a rising channel of global integration

Alongside inward investment, Vietnam has begun expanding outward foreign direct investment (OFDI), signaling the growing maturity of its private sector. In 2024, Vietnamese firms invested nearly $664.8 million abroad, a 57.7% increase over the previous year, raising cumulative OFDI to $22.59 billion across 1,825 projects. While modest compared with inbound FDI, this outward expansion demonstrates a shift toward two-way capital flows.

Sectorally, OFDI has evolved beyond traditional resource-based projects. In 2024, professional services, science, and technology attracted 30.2% of capital, compared with zero in 2023. Manufacturing captured 21%, while electricity generation and distribution rose to 14.2%. Still, mining remains dominant with $7 billion, followed by agriculture ($3.4 billion) and telecom and IT services ($2.8 billion).

Regionally, ASEAN remains the top destination, led by Laos ($5.7 billion) and Cambodia ($2.94 billion). This reflects both geographic proximity and lower entry costs, but also indicates a correlation: Vietnam’s integration into Southeast Asia’s production networks is deepening through capital as well as trade. Major Vietnamese players such as Viettel, FPT, Vinamilk, and TH Group are establishing footprints abroad, often through M&A and technology-driven investments.

Challenges and reform needs

Despite progress, OFDI faces structural weaknesses: small-scale projects, concentration in resource-based sectors, and limited engagement in high-tech or global services. The imbalance between large-scale inbound FDI and relatively modest outbound capital reflects a transitional phase. Experts argue that stronger institutional support, risk insurance funds, and managerial training are needed to help Vietnamese firms expand globally.

Recognizing these constraints, the Ministry of Finance has proposed reforms to streamline procedures. The plan would eliminate multiple approval steps by shifting oversight to the State Bank of Vietnam for foreign exchange registration, thereby cutting red tape and reducing costs for firms. The causal expectation is that simpler rules will encourage more enterprises to pursue international expansion, aligning OFDI with national growth strategies.

Strategic vision to 2045

Vietnamese policymakers envision OFDI as a complementary force alongside FDI, creating a balanced “two-legged” growth model. By 2045, the goal is to foster Vietnamese multinational corporations in clean energy, IT, telecommunications, and financial services. This ambition aligns with the broader trajectory of building an independent yet globally integrated economy, one capable of sustaining competitiveness while reducing overreliance on foreign capital inflows.

Vietnam’s economic narrative has evolved from independence in 1945 to FDI-led industrialization in the Đổi Mới era, and now toward OFDI-driven global integration. FDI remains the cornerstone of growth, but OFDI is emerging as a vital instrument for asserting Vietnam’s position in global value chains. Together, these twin engines reflect a country increasingly confident in shaping its own development path and projecting its economic influence beyond its borders.

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Commodity

Cement as a barometer of China’s economy

Few products capture the trajectory of China’s modern economy as vividly as cement. After more than two decades of continuous expansion tied to skyscrapers, highways, and vast urban projects, cement output is now collapsing. In July 2025, production reached just 146 million tons, down more than 5 percent year-on-year and the lowest level for the month since 2009. Unlike steel or automobiles, cement is almost entirely consumed domestically, making it a direct gauge of construction and investment demand. This structural characteristic explains why its downturn serves as a more precise indicator of economic stress than many other industrial metrics.

The peak in cement output occurred in May 2020, when Beijing’s pandemic stimulus fueled a construction surge. Since then, the reversal has been stark. The property bubble that had supported decades of expansion has deflated, infrastructure investment remains sluggish, and extreme weather has further disrupted construction activity. The causal relationship between the property downturn and cement demand is straightforward: fewer real estate projects directly translate into reduced consumption of cement.

Broader industrial slowdown and financial strain

Cement is not the only signal of weakening momentum. Steel production in July fell to its lowest level since 2017, real estate investment saw its sharpest contraction since 2020, and yuan-denominated credit growth declined for the first time in two decades. These indicators highlight both cyclical pressures from weaker demand and structural limits as China transitions away from debt-driven, construction-led growth. The correlation between these sectors reinforces the narrative that the slowdown is systemic rather than isolated.

Adding further pressure is Beijing’s supply-side reform agenda. Authorities have instructed cement producers to cut capacity to align production more closely with realistic demand levels. While this policy may help prevent oversupply and improve efficiency, it also ensures that output declines will persist even if demand stabilizes. The combination of weaker market-driven demand and regulatory-imposed capacity limits creates a dual headwind for the sector.

From growth engine to warning signal

For decades, cement symbolized China’s rapid rise, shaping the skyline of modern cities. Today, it represents the heavy burden of a property sector in decline and the challenge of sustaining long-term growth when domestic demand is exhausted. The shift from expansion to contraction in cement production mirrors the broader transition China faces: moving from a model reliant on construction and investment toward one that must grapple with the realities of slower, more sustainable growth.

China’s cement sector, once the backbone of its urban transformation, has become an unmistakable warning sign of economic fragility. The collapse in output reflects both immediate shocks in the property market and deeper structural shifts in the growth model. Unless new engines of demand emerge, the second-largest economy in the world will continue to face the difficult task of reconciling past excesses with the need for sustainable development.

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IC Markets

Commodity

Forex

Economic

What happened in the U.S session?

The overnight US session was marked by moderate equity declines as traders awaited vital retail earnings and policy signals from Jackson Hole. Data releases confirm resilience in retail and moderate but persistent inflation, keeping rate cut bets alive. Communications, real estate, and select tech stocks saw selling, while Treasuries moved higher on inflation signals. Crypto assets dipped sharply in Asia trading, and Gulf equities were pressured by the regional focus on US policy. Investors remain risk-aware, anticipating significant developments later in the week.

What does it mean for the Asia sessions?

Asian equities are expected to open positively, buoyed by a robust performance on Wall Street. The S&P 500 and Nasdaq are at record highs, supporting risk appetite across the region. China’s LPR announcement and market reactionJapan’s trade and machinery orders dataOngoing US-China trade talks and policy headlines movements amid a weaker US dollar and surging Asian currencies, Corporate earnings reports and sector rotation, especially in tech and EV sectorsExpect continued volatility from geopolitical headlines and economic data, but the immediate outlook for Asian equities on August 19 remains firmly positive.

The Dollar Index (DXY)

The US dollar is stronger on August 19, 2025, on the back of risk events, Fed outlook, and strong domestic data. Major FX pairs are broadly weaker against the USD (EUR/USD, GBP/USD, AUD/USD). Market focus remains on the Jackson Hole Symposium and US rate cut probabilities, as well as geopolitical developments in Europe. Strong US wholesale price data and solid July retail sales pushed traders to pare back aggressive bets on a Federal Reserve rate cut next month.Central Bank Notes:

● The Board of Governors of the Federal Reserve System voted unanimously to maintain the Federal Funds Rate in a target range of 4.25% to 4.50% at its meeting on July 29–30, 2025, keeping policy unchanged for the fifth consecutive meeting.

● The Committee reiterated its objective of achieving maximum employment and inflation at the rate of 2% over the longer run. While uncertainty around the economic outlook has diminished since earlier in the year, the Committee notes that challenges remain and continued vigilance is warranted.

● Policymakers remain highly attentive to risks on both sides of their dual mandate. The unemployment rate remains low, near 4.2%–4.5%, and labor market conditions are described as solid. However, inflation is still somewhat elevated, with the PCE price index at 2.6% and core inflation forecast at 3.1% for year-end 2025, up from earlier projections; tariff-related pressures are cited as a contributing factor.

● The Committee acknowledged that recent economic activity has expanded at a solid pace, with second-quarter annualized growth estimates near 2.4%. However, GDP growth for 2025 has been revised downward to 1.4% (from 1.7% projected in March), reflecting expectations of a slowdown in the coming quarters.

● In the revised Summary of Economic Projections, the unemployment rate is expected to average 4.5% in 2025, and headline PCE inflation is forecast at 3.0% for the year, with core PCE at 3.1%. Policymakers continue to anticipate that inflation will moderate gradually, with ongoing risks from tariffs and global conditions.

● The Committee reaffirmed its data-dependent and risk-aware approach to future policy decisions. Officials stated they are prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede progress toward the Fed’s goals.

● As previously outlined, the Committee continues the measured run-off of its securities holdings. The pace of balance sheet reduction, which slowed since April (monthly redemption cap on Treasury securities reduced from $25B to $5B, while holding agency MBS cap steady at $35B), was left unchanged this month to support orderly market functioning and financial conditions.

● The next meeting is scheduled for 16 to 17 September 2025.

Next 24 Hours Bias

Medium Bearish

Gold (XAU)

Gold prices are holding firm above $3,300/oz, buoyed by geopolitical tension, looming Fed policy shifts, central bank demand, and global currency volatility. Near-term movements are likely to be range-bound as investors await the outcomes of key diplomatic talks and monetary policy signals, but medium- to long-term sentiment remains bullish.The gold market is highly sensitive this week to ongoing diplomatic efforts around the Russia-Ukraine conflict. A key peace summit involving US President Donald Trump, Ukrainian President Zelenskiy, and top European leaders is scheduled for this week. A perceived reduction in geopolitical risk could soften gold prices in the short term.

Next 24 Hours Bias

Medium Bullish

The Australian Dollar (AUD)

On August 19, 2025, the Australian Dollar faces pressure from a stronger US Dollar and global trade tensions. RBA’s recent rate cuts and positive domestic jobs data provide support, while weak Chinese stats and expectations of further monetary easing temper bullish sentiment. Markets remain highly attentive to consumer confidence data, central bank commentary, and major US economic updates this week.RBA Governor Michele Bullock signaled a flexible approach, with decisions made meeting-by-meeting, and highlighted the need to balance price stability against moderating inflation and evolving market volatility.Central Bank Notes:

● The RBA held its cash rate steady at 3.85% at the July meeting on 8 July 2025, following a 25-basis-point reduction in May and in line with widespread market expectations, after recent data showed inflation tracking within the target band.

● Inflation continues to ease from its peak, with higher interest rates helping to rebalance demand and supply across the Australian economy. Data for the June quarter signaled ongoing progress, though underlying pressures persist in certain sectors.

● Trimmed mean inflation for the June quarter likely remained near 2.9% and headline CPI around 2.4%, both within the RBA’s 2–3% target range. The Board noted further evidence of inflation convergence, but flagged that not all price categories are moving in tandem.

● Financial markets have exhibited increased volatility in the wake of global tariff and trade policy developments—especially following recent announcements from the U.S. and the EU. This has pushed asset prices higher but contributed to an uncertain outlook for domestic growth and employment.

● Private domestic demand showed a tentative recovery. Real household incomes improved, and signs of easing household financial stress emerged, but some business sectors continued to face subdued demand, limiting their ability to pass on cost increases.

● Labour market conditions remained tight overall. Employment continued to expand, with low rates of underutilization. Business surveys suggest labour availability remains a constraint, though there are signs of a gradual easing compared to earlier in 2025.

● Underlying wage growth softened modestly, though unit labour cost growth remains elevated due to below-trend productivity gains. The Board remains attentive to developments in wage and productivity dynamics as cost pressures continue to evolve.

● Uncertainties persist for both domestic activity and inflation. Consumption growth has risen, but more slowly than anticipated three months ago, with global and domestic factors both contributing to the cautious outlook.

● There remains a risk that household spending picks up more slowly than forecast, which could result in ongoing subdued aggregate demand and a sharper deterioration in employment conditions.

● Given that inflation is expected to remain around the target band, the Board judged that it was appropriate to keep policy settings unchanged in July, maintaining a position that is still mildly restrictive.

● The Board continues to monitor all incoming data and assesses risks carefully, with a focus on global trends, domestic demand indicators, inflation outcomes, and the labour market outlook.

● The RBA remains committed to its mandate of price stability and full employment and stands ready to adjust policy as needed to achieve these objectives.

● The next meeting is on 11 to 12 August 2025.

Next 24 Hours Bias

Medium Bearish

The Kiwi Dollar (NZD)

The NZD is slightly firmer, with the market’s attention fixed on Wednesday’s RBNZ policy meeting and continued global central bank cues. The broader outlook points to controlled inflation and a dovish RBNZ, keeping the NZD on a modestly pressured path barring any hawkish surprises.Zealand’s Performance of Services Index rose to 48.9 in July, up from 47.6 in June. This is still below expansion territory (50+), but shows some resilience. New Zealand’s inflation expectations for Q3 2025 eased slightly (two-year expectations at 2.28%, one-year at 2.37%), supporting the RBNZ’s dovish stance.

Central Bank Notes:

● The Monetary Policy Committee (MPC) agreed to hold the Official Cash Rate (OCR) at 3.25% on 9 July, marking the first pause following six consecutive rate cuts.

● The MPC cited heightened uncertainty and near-term inflation risks as reasons to wait until August for further action.

● Although the annual consumer price index inflation increased to 2.5% in the first quarter of 2025, it remained within the MPC’s target range of 1 to 3%, noting that the outlook for medium-term inflation pressures has evolved broadly in line with the May MPS projections.

● While it is expected to be near the upper end of the band in the second and third quarters of this year, easing core inflation and spare capacity in the economy should help return it toward the 2% midpoint over time.

● The MPC noted that, despite global factors, domestic financial conditions are evolving broadly as expected, as mortgage and deposit interest rates have continued to decline, reflecting a lower OCR, strong bank liquidity, and soft credit growth.

● In aggregate, GDP growth over the December and March quarters was stronger than expected, reflecting a pickup in household consumption and business investment. However, higher-frequency indicators suggest weaker-than-expected growth in April and May.

● Large economic policy shifts overseas and concerns about sovereign risk could result in additional financial market volatility and increased bond yields, while prolonged economic uncertainty might induce further precautionary behaviour by households and firms, slowing the domestic economic recovery.

● Subject to medium-term inflation pressures continuing to ease in line with the Committee’s central projections, the Committee expects to lower the OCR further, broadly consistent with the projection outlined in May.

● The next meeting is on 20 August 2025.

Next 24 Hours Bias

Weak Bearish

The Japanese Yen (JPY)

The Japanese Yen remains on a weakening trajectory against major currencies, particularly the US Dollar, as global and domestic factors exert pressure. Geopolitical events and US monetary policy are key influences driving daily moves in JPY. BoJ continues its cautious policy stance, with inflation not high enough for urgent tightening. The Yen’s weakness remains a notable trend as analysts project further depreciation, with forecasts estimating USD/JPY could reach 148.5 by the quarter’s end and possibly 152.63 by August 2026.

Central Bank Notes:

The Policy Board of the Bank of Japan decided on 31 July, by a unanimous vote, to set the following guidelines for money market operations for the inter-meeting period:

● The Bank will encourage the uncollateralized overnight call rate to remain at around 0.5%.

● The BOJ will maintain its gradual reduction of monthly outright purchases of Japanese Government Bonds (JGBs). The scheduled amount of long-term government bond purchases will, in principle, continue to decrease by about ¥400 billion each quarter from January to March 2026, and by about ¥200 billion each quarter from April to June 2026 onward, targeting a purchase level near ¥2 trillion in January to March 2027.

● Japan’s economy is experiencing a moderate recovery overall, though some sectors remain sluggish. Overseas economies are generally growing moderately, but recent trade policies in major economies have introduced pockets of weakness. Exports and industrial production in Japan are essentially flat, with any uptick largely driven by front-loaded demand ahead of U.S. tariff increases.

● On the price front, the year-on-year rate of change in consumer prices (excluding fresh food) remains in the mid-3% range. This reflects continued wage pass-through, previous import cost surges, and further increases in food prices, particularly rice. Expectations for future inflation have begun to rise moderately.

● The effects of the earlier import price and food cost increases are expected to fade during the outlook period. There may be a temporary stagnation in core inflation as overall growth momentum softens.

● Looking forward, the economy is likely to see a slower growth pace in the near term as overseas economies feel the pinch of ongoing global trade policies, putting downward pressure on Japanese corporate profits. Accommodative financial conditions are expected to buffer these headwinds somewhat. In the medium term, as global growth recovers, Japan’s growth rate is also expected to improve.

● With renewed economic expansion, intensifying labor shortages, and a steady rise in medium- to long-term expected inflation rates, core inflation is projected to gradually pick up. By the latter half of the BOJ’s projection period, inflation is forecast to move in line with the 2% price stability target.

● There are multiple risks to the outlook, with especially elevated uncertainty regarding the future path of global trade policies and overseas price trends. The BOJ will continue to closely monitor their impact on financial and foreign exchange markets, as well as on Japan’s economy and inflation.

● The next meeting is scheduled for 17 to 18 September 2025.

Next 24 Hours BiasStrong Bullish

Oil

On Monday, August 18, 2025, Brent crude futures settled 1.14% higher at $66.60 per barrel, while the U.S. West Texas Intermediate (WTI) crude was up 0.99% to $63.42 per barrel. This marks a recovery from last week’s losses for both benchmarks. Brent crude is around $66.60/barrel, and WTI is at $63.42/barrel.OPEC+ output hike for September is set at 547,000 bpd, aimed at recapturing market share and stabilizing supply. U.S., Russia, and Ukraine negotiations and U.S. pressure on India’s Russian oil purchases impact trader sentiment.Regional gasoline prices are rising, while diesel and kerosene prices are dropping, reflecting nuanced supply and demand dynamics in different fuel types.Next 24 Hours Bias

Medium Bearish

Source: IC Markets

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Economic

Trade performance remains resilient

According to Mirae Asset Vietnam, total trade turnover in the first seven months of 2025 stood at $514.7 billion, a 16.3% increase compared with the same period last year, though slightly below 2024’s 18.2% pace. Exports reached $262.4 billion, up 14.8%, while imports rose 17.9% to $252.2 billion. The growth reflects a direct causal link between demand recovery in major markets and Vietnam’s rising trade volumes.

Key export categories continued to post strong gains, including electronics (+41.9%), machinery (+14.6%), and textiles (+11%), while phone exports were nearly flat. Major markets such as the United States, Japan, South Korea, and China all reported higher import demand from Vietnam, highlighting a stable diversification of export destinations.

Customs activity and logistics growth slowing

Customs clearance volumes remained solid but showed signs of deceleration. Total cargo processed in the first five months reached 461 million tons, a 12.8% increase, but far below the 38.9% expansion of the same period in 2024. Export cargo volumes were nearly unchanged at 89.5 million tons, while imports rose 6.6% to 119 million tons.

Container throughput reached 13.2 million TEUs, up 9.3%, but still weaker than last year’s 24.6%. Both exports and imports stood at 4.2 million TEUs, rising 11% and 11.9% respectively. This demonstrates a clear correlation between global trade moderation and slower growth in Vietnam’s logistics activity.

Industrial production and FDI trends

Vietnam’s industrial production index (IIP) rose 8.5% in July from a year earlier, signaling a positive trend. However, the Purchasing Managers’ Index (PMI) only just climbed above 50, pointing to a recovery that remains fragile. Foreign direct investment inflows stayed robust during the first seven months, yet registered capital and project numbers showed signs of stalling, a factor that could weigh on long-term manufacturing expansion.

The global shift toward supply chain diversification is accelerating as firms seek to reduce reliance on one or two major markets. Vietnam is well positioned to benefit thanks to political stability, improving infrastructure, and its participation in multiple free trade agreements. These factors enhance competitiveness and reinforce its attractiveness as a manufacturing hub. The trend is also creating opportunities for logistics and maritime transport as shipping demand rises across Southeast Asia.

Risks from global economic headwinds

Despite the strong trade performance, external risks remain. Potential industry-specific tariffs in certain markets could reduce competitiveness for Vietnamese goods. Additionally, the World Bank has downgraded growth forecasts for several major economies in 2025, raising concerns about weaker global demand. This could indirectly weigh on Vietnam’s export momentum, as softer consumer spending in large markets dampens import demand.

Vietnam continues to ride the wave of global supply chain realignment, with exports, imports, and logistics showing resilient growth in 2025. Yet to sustain this momentum, the country must strengthen its infrastructure, improve business competitiveness, and remain vigilant to external risks stemming from trade policies and slowing global growth.

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Economic

Commodity

Market movement in early trade

Oil prices slipped slightly in early Asian trading, with Brent crude down 0.11 percent at $66.53 a barrel and West Texas Intermediate for September delivery down 0.09 percent at $63.36. The more active October WTI contract fell 0.14 percent to $62.61. This modest decline came after prices had settled about 1 percent higher in the prior session, underscoring the volatile balance between geopolitical developments and fundamental supply-demand factors.

The immediate catalyst for the decline was news that US President Donald Trump had initiated arrangements for a trilateral summit involving himself, Russian President Vladimir Putin, and Ukrainian President Volodymyr Zelenskiy. The correlation between these talks and oil price movements is significant: the possibility of easing tensions and lifting sanctions on Russian crude would increase global supply availability, exerting downward pressure on prices.

Scenarios shaping market outlook

Analysts caution that outcomes of the talks could influence oil in opposite directions depending on the policy path chosen. Bart Melek of TD Securities suggested that a resolution reducing the threat of secondary sanctions could push Brent toward $58 per barrel in late 2025 and early 2026, reflecting an easing supply constraint. Conversely, if the US opts to apply broader secondary tariffs on buyers of Russian oil similar to recent measures imposed on India this would restrict market access for Russian barrels, likely sending crude back to recent highs. The causal link here lies in how policy choices directly alter the balance of available supply and global demand expectations.

While Zelenskiy described his talks with Trump as constructive, Kyiv and its European allies remain wary that Washington could press for a deal on Moscow’s terms. This uncertainty leaves traders cautious, with markets reluctant to price in a definitive direction until clearer signals emerge from upcoming diplomatic engagements.

Oil markets remain finely balanced between optimism for a geopolitical breakthrough and the risk of policy outcomes that tighten supply. The immediate dip in prices reflects a cautious interpretation of diplomatic progress, but the potential for either easing sanctions or tightening tariffs ensures volatility will persist in the near term.

Source: Reuters

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Economic

Rising debt service costs

According to the National Assembly Budget Office and the Ministry of Economy and Finance, government interest payments reached 28.2 trillion won at the end of 2024, marking a 51.4 percent jump compared with 2020. The cost of servicing debt has grown at an average rate of 13 percent annually and is projected to exceed 30 trillion won ($22 billion, or nearly 578 trillion VND) for the first time in 2025. This surge highlights a direct causal link between increased bond issuance to cover fiscal deficits and the soaring cost of interest payments.

South Korea’s total government debt climbed to 1,141.2 trillion won by the end of 2024, up nearly 40 percent from 819.2 trillion won in 2020. Treasury bonds account for 92 percent of this debt, with the remainder spread across housing bonds, foreign exchange stabilization bonds, and other liabilities. Debt service already absorbs a growing share of expenditure, rising from 3 percent of total government spending in 2020–2022 to 4.4 percent last year. This signals an increasingly rigid fiscal structure where a larger portion of the budget is locked into debt obligations.

Refinancing risks intensify

South Korea now risks falling into a debt rollover cycle. In 2025, the government must repay 94 trillion won in maturing bonds, with another 98 trillion won coming due in 2026. Because paying back principal in full is impractical, the government typically issues new bonds to refinance older ones. However, an excessive refinancing burden could depress bond prices and push yields higher, exacerbating the interest bill. Evidence of stress is already emerging: the yield spread between 10-year and 3-year government bonds widened from 0.242 percentage points at the start of the year to 0.343 points in mid-August, showing investor concerns about long-term debt supply.

The government’s expansionary fiscal stance, relying on supplementary budgets financed by deficit bonds, has added to bond market pressures. As short-term yields fall on expectations of central bank rate cuts, long-term yields remain elevated due to fears of mounting issuance. This divergence reflects a correlation between policy-driven debt expansion and investor skepticism about long-term sustainability.

Warnings from experts

Economists caution that South Korea’s accelerating debt trajectory could restrict fiscal maneuverability in the years ahead. As of July 2025, the government had borrowed 113.9 trillion won through the Bank of Korea’s overdraft facility, 8.4 percent higher than a year earlier, underscoring reliance on short-term financing. Scholars argue that even if fiscal stimulus is necessary, it must be directed into sectors that enhance long-term growth potential rather than short-lived boosts, given the growing weight of debt service.

South Korea’s rising debt and interest burden illustrate the structural risks of relying heavily on bond-financed fiscal expansion. With large volumes of pandemic-era debt coming due and refinancing costs climbing, the government faces a narrowing policy space. Unless growth-enhancing strategies can offset these pressures, Asia’s fourth-largest economy risks entering a cycle where borrowing to service old debt constrains its ability to invest in future development.