As Middle East war rattles financial markets, the spillover to the real economy must be prevented

Given the gravity of the crisis, the government should respond with a greater sense of urgency and activate an emergency response system. Above all, policymakers must prevent financial instability from spreading to the real economy.

The Kospi index is displayed on a screen at Hana Bank’s headquarters in Jung District, central Seoul, on the afternoon of March 4, after the benchmark index fell for a second straight day amid armed clashes involving the United States, Israel and Iran. [JUN MIN-KYU]

The fallout from the war between the United States and Iran is hitting Korea’s economy. On Wednesday, the Kospi plunged more than 12 percent, even after a sidecar mechanism temporarily halted trading. Over the past two days, the index has fallen nearly 20 percent. On the New York Stock Exchange the previous night, the won-dollar exchange rate rose above 1,500 won for the first time in 17 years. Average gasoline prices also surpassed 1,800 won per liter ($4.62 per gallon). If the conflict escalates further, Korea could face an emergency marked by a high exchange rate, high oil prices and high inflation rates. Measures to prevent the spread of these “three highs” are urgently needed.

The immediate threat centers on the Strait of Hormuz, a vital chokepoint for global energy supplies. The situation deteriorated after Iranian attacks set 10 oil tankers on fire, raising speculation that the U.S. Navy may escort vessels through the region. Twenty-six Korean tankers are currently stranded near the strait.

Korea, the world’s seventh-largest consumer of crude oil, relies on imports for more than 90 percent of its energy. About 70.7 percent of imported crude oil and 20.4 percent of liquefied natural gas pass through the Strait of Hormuz. Although Korea maintains enough oil reserves for about six months, those supplies would eventually be depleted if this shipping route were blocked.

The longer the Middle East conflict continues, the greater the risk is to Korea’s real economy. The situation poses a serious challenge at a time when the country hoped for an economic rebound supported by strong exports.

Iran has launched drone attacks against U.S. military facilities in Persian Gulf countries, heightening concerns for Korean businesses operating in the region. More than 140 Korean companies are involved in projects worth about 100 trillion won ($67.6 billion) in the Middle East. These include Saudi Arabia’s Neom city development and nuclear power and artificial intelligence infrastructure projects.

Disruptions to logistics would also cast a shadow over Korea's key exports, such as automobiles, smartphones and cosmetics.

Despite the seriousness of the situation, the macroeconomic and financial policy meeting known as the “F4,” led by the finance minister and deputy prime minister, has not yet convened. The government has previously encouraged stock investment despite repeated media warnings about excessive borrowing to buy shares.

Even as markets show signs of panic and concerns grow over heavily leveraged investment accounts, officials continue to emphasize that foreign exchange reserves remain sufficient. Given the gravity of the crisis, the government should respond with a greater sense of urgency and activate an emergency response system.

Above all, policymakers must prevent financial instability from spreading to the real economy.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.