Middle East Tensions Escalate, Putting South Korea's Economic Growth Outlook on Red Alert

As geopolitical tensions rise in the Middle East, South Korea's economy faces growing threats. The Organisation for Economic Co-operation and Development (OECD) has lowered its economic growth forecast for South Korea this year from 2.1% to 1.7%, reflecting challenges such as rising international oil prices and supply chain instability.

In the real economy sector, sharp increases in energy prices and supply chain disruptions have emerged. International oil prices have surpassed $110 per barrel for Brent crude. The potential blockade of the Strait of Hormuz poses a risk of cutting off 10% of global oil supply, creating an emergency situation for the supply of raw materials highly dependent on the Middle East, such as naphtha.

In the currency market, the won-dollar exchange rate approached an average of 1,490 won in March 2026, reaching its highest level in 17 years since the foreign exchange crisis. The depreciation of the won against the dollar has acted as a key factor in driving up import prices, and the OECD projects South Korea's inflation rate at 2.7%. As pressure mounts for monetary tightening to curb high inflation, the upper limit for prime banks' mortgage rates has exceeded 7%.

In the capital markets, foreign investors recorded their largest-ever net sales in March 2026, offloading approximately 30 trillion won worth of stocks. The KOSPI index also experienced a sharp decline, dropping by 12.55% in March 2026. On March 27, 2026, the KOSPI closed at 5438.87, down 21.59 points from the previous trading day, while the KOSDAQ index closed at 1141.51, up 4.87 points. On the same day, the won-dollar exchange rate closed at 1508.9 won in the Seoul foreign exchange market, up 1.9 won from the previous day, marking the end of the week's trading.

The government has prepared a supplementary budget of 25 trillion won. Measures for energy conservation, such as mandating a five-day driving scheme for private vehicles, are being considered if international oil prices reach $120-$130 per barrel. The government is reviewing plans to diversify import sources for essential raw materials like naphtha and further reduce oil taxes.

Depending on the unfolding situation in the Middle East, South Korea's economy could face stagflation, a combination of inflation and economic stagnation. Experts estimate that a blockade of the Strait of Hormuz could reduce South Korea's growth rate by up to 0.8 percentage points. The government has expressed its intent to stabilize the market using foreign exchange reserves and is reviewing measures to diversify energy and raw material supply chains. Policy efforts must focus on guiding household debt towards a soft landing in preparation for a prolonged period of high exchange rates and interest rates, and securing a safety net for the foreign exchange market, such as inclusion in the World Government Bond Index (WGBI).