South Korea's chip exports pay for a record budget and complicate the rate call

A record budget built on chip exports

Lee told the National Assembly on Monday that 2027 spending would rise 12.8% to 820.9 trillion won ($610.14bn). The plan includes 21.3 trillion won for semiconductors, physical AI and AI data centers. That is nearly double the 2026 level.

The split decides how much state money reaches chipmakers and AI infrastructure, three weeks before the Bank of Korea decides whether to raise rates again. Chip shipments are booming while private consumption fell 0.2% in the third quarter, so the boom may not feel like a recovery at home.

A separate 4.7 trillion won is earmarked for a sovereign AI model Lee called the world's highest performance. Lee said the higher spending would mean "virtually no net increase in government debt". New bonds would repay existing debt. October shipments rose 93.7% to a record $115.3bn, according to Korea Customs Service data released on Sunday. Exports reached $930bn in the first 10 months of 2026, passing $900bn for the first time.

The export numbers behind the plan

The trade ministry reported working-day adjusted export growth of 76.1% in October, with total shipments at $115.3bn. Unadjusted, exports rose 93.7%.

September was bigger in cash: a record $121.1bn, with growth revised to 83.7%.

Imports rose 36% to $72.78bn, leaving a $42.5bn surplus. That is down from September's record $49.97bn. Semiconductors did most of the work: chip exports jumped 259% to $56.4bn, computer exports rose 497%, petroleum products 80% and automobiles 18%. The ministry said the 93.7% gain was the fastest since January 1974. Chuseok fell in September this year and in October last year, which is why the working-day figure is the cleaner gauge.

The Bank of Korea is caught between boom and weak demand

The Bank of Korea held rates at 3% in October while it assessed two earlier increases.

Bank of America argued that domestic spillovers and positive output gaps add to inflation pressures in South Korea and Taiwan, supporting further hikes. The domestic case is not clear cut. The economy grew 1% in the third quarter from the previous three months, beating a 0.8% forecast, and facility investment rose 4.1%, but private consumption fell 0.2%. September headline consumer prices rose 2.9% and core inflation was 2.8%, both above the 2% target.

The won did not take the export numbers as a signal: the dollar-won rate rose 0.71% to 1,343.09 on Monday.

The spillover is uneven, and China is closing in

Bank of America put year-to-date export growth at 57% in South Korea, 44% in Taiwan and 21% in China. All three are riding the same AI demand.

It still expects Taiwan to see the largest domestic spillover effects, even though South Korea recorded the strongest export growth, citing the relative size of each tech sector and capacity constraints. On the supply side, Samil PwC warned in a report made public on Monday 26 October that Chinese competition would heat up first in conventional memory, mature-node manufacturing, and packaging and testing. It urged South Korean chipmakers to sharpen cost competitiveness in commodity memory while doubling down on advanced packaging and high-bandwidth memory.

What to watch

The Bank of Korea's next decision is due on 26 November, with updated growth and inflation projections. Fresh inflation data is due on Tuesday.

Shin said exports are on course to top $1 trillion this year. The trade ministry said that would make South Korea the fourth country to reach the mark, after the US, China and Germany. The Bank of Korea now expects growth this year and next to come in well above the 3.3% and 2.9% it projected in August.

What the numbers do not settle

Bank of America said the boom lifts tax revenues in all three. Tax windfalls are funding transfers and investment in Taiwan and Korea, while China has not seen a comparable spending boost.

The Bank of Korea named its own uncertainty when it held rates: "the degree of expansion in the semiconductor sector and its spillover onto domestic demand". The October surplus narrowed as imports grew faster. Import growth accelerated to 36%. The government has not said how much of the 21.3 trillion won AI and semiconductor package is new spending rather than repurposed funds.

Why exporters are watching the rate path

Bank of America said stronger domestic demand and positive output gaps in Korea and Taiwan support further rate hikes. China is the exception. Softer demand there warrants more policy easing.

Policy stays tight until inflation is heading to 2%, Shin said. The central bank will publish updated growth and inflation projections alongside the November decision. Exporters have a wider stake than the rate call alone: South Korea's export performance is closely watched as a gauge of global trade conditions, particularly electronics and semiconductor demand.

The budget's talent and defence add-ons

The government plans to train 2,000 chip specialists. Lee said they would "lead semiconductor design and the regional semiconductor industry".

It is also expanding AI education for students, job seekers and existing workers, and setting up university "contract departments" tied to companies such as Samsung Electronics and SK Hynix, where firms help design courses and recruit graduates before they finish. Defence spending rises too. Defence expenditure is set to rise 8.2% to 73.3 trillion won, and Lee said South Korea would build a "hybrid manned and unmanned system based on AI, robots, and drones".

The risk from China's memory push

Chinese competition will heat up first in conventional memory, Samil PwC said. Mature-node manufacturing and packaging and testing come next, according to the report made public on 26 October.

The report urged Samsung and SK Hynix to defend profitability as Chinese rivals scale up. It said they should sharpen cost competitiveness in commodity memory and double down on advanced packaging and high-bandwidth memory. Bank of America said China benefits from stronger technology exports, but weaker domestic demand and headwinds limit the broader impact there. South Korea's 57% growth was the strongest of the three.

What happens next

The 26 November decision is the next test. The question is whether the export boom is feeding domestic inflation and demand.

Fresh inflation data due on Tuesday comes first. Beyond that, the government expects South Korea to exceed $1 trillion in annual exports for the first time this year. The trade ministry said that would put it fourth after the US, China and Germany.