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Korea braces for blows from Middle East conflict

April 15, 2024 - 16:08 By Im Eun-byel
An electronic board shows the benchmark bourse Kospi closing at 2,670.43 points, down 11.39 points or 0.42 percent, from the previous trading session, on Monday at Hana Bank's trading room in central Seoul. (Yonhap)

The heightened geopolitical tensions from Iran's attack on Israel have cast gloom on Korea as well, bringing down local shares and leading to currency depreciation.

While the Korean won has been losing its value against the US greenback in recent days with weakened anticipation on the US Federal Reserve taking a pivot in its monetary policy any time soon, the escalated volatility has led to further depreciation.

The won weakened against the dollar on Monday, with the exchange rate closing at 1,384 won, up 8.6 won from the 1,375.4 won in the previous trading day.

After opening at 1,382 won, the rate fluctuated in the 1,380 won range and dipped to 1,386.3 won during intraday trading, reaching the lowest in 17 months since the 1,394.6 won on Nov. 8, 2022.

The heightened tension also brought down the local bourse as investors flocked to safe-haven assets.

The benchmark Kospi closed at 2,670.43 points, down 11.39 points or 0.42 percent, from the previous trading session. After kicking off at 2,661.36, it dipped to 2,641.16 but made a slight recovery throughout the trading.

While retail investors racked up shares worth 248.5 billion won ($180 million) on the main bourse, foreigners and institutional investors net sold 238 billion won and 28 billion won, respectively. It was the first time in five trading days for foreign investors to turn to net selling.

The secondary bourse Kosdaq closed out at 852.47, down 8.05 points or 0.94 percent from the previous trading.

"Though the local financial market has remained stable, there are potential factors of market insecurity, such as the heightened uncertainty of the US taking a pivot in its monetary policy and escalated geopolitical tension in the Middle East,” Financial Services Commission Chair Kim Joo-hyun said at an emergency meeting held Monday.

The attendees of the meeting assessed that the crisis would not have a direct impact on the local finance industry as local financial institutions’ exposure to the involved countries remains low, with $1 million for Iran and $290 million for Israel.

The Bank of Korea also vowed to keep a close eye on the situation.

“With the Middle East crisis, the global 'risk-off' tendency is likely to strengthen for a while. The volatility of the financial market could escalate, depending on the response of Israel and intervention of neighboring countries," BOK Senior Deputy Gov. Ryoo Sang-dai said.

"If the volatility of the financial market is to escalate, (the central bank) will execute market stabilization measures at the right time," he said.

With the heightened conflict in the Middle East, international fuel prices are projected to surge, pressuring Korea, a country heavily dependent on energy imports.

Mideast Gulf crude makes up some 70 percent of Korea's total crude imports and Iran is the third-largest oil producer in the Organization of the Petroleum Exporting Countries.

In light of the situation, the government announced Monday it will extend the tax cut on fuel consumption, which was set to end in April, by an additional two months until June. The fuel tax reduction scheme, which began in 2021 in an attempt to control inflation, has been extended for the ninth time.

With the extension, a 25 percent discount on the consumption of gasoline and a 37 percent discount on the consumption of diesel and liquefied petroleum gas will be maintained.

The tax reduction brings down the retail price of gasoline by 205 won per liter, diesel by 212 won and LPG by 73 won.

The average retail price of gasoline stood at 1,691.52 won per liter in Korea, according to Opinet, a website operated by the Korea National Oil Corp. as of 5 p.m. The average price for Seoul was 1,765.73 won, marking an over 30 won surge from early April.

The government aims to bring down the prices with the tax cut on fuel while Korea continues its combat against inflation.

“The current fuel tax cut, fuel subsidies on diesel and compressed natural gas will be extended another two months until the end of June to lessen the burden on livelihoods,” Finance Minister Choi Sang-mok said.