🚨 Middle East Conflict Escalates: Financial Sector on Emergency Alert, Exchange Rate and Inflation Double Impact Feared
Today Korean Economic News | 2025.06.24
📌 Middle East Conflict Escalates, Financial Sector on Emergency Alert... Exchange Rate and Inflation 'Double Impact' Warning
💬 As tensions in the Middle East rise due to clashes between the US and Iran, Korea's financial sector has also taken emergency measures. Major financial groups including KB, Shinhan, Hana, and Woori Financial have entered emergency management mode, and authorities have activated a cooperative system. The won-dollar exchange rate soared to 1,384 won, and inflation pressure from rising international oil prices is intensifying.
The financial sector is watching carefully for the impact of rising exchange rates on risky assets and concerns about deteriorating soundness, paying close attention to the long-term shock that could affect the real economy. Hana Bank has decided to provide 11.3 trillion won in liquidity support to companies operating in the Middle East, while Woori Financial is strengthening field-focused financial support.
1️⃣ Easy to Understand
A major conflict in the Middle East is directly affecting Korea's economy and financial markets. Banks have entered emergency mode, and both exchange rates and oil prices are rising at the same time, which could change our daily lives.
The Middle East region produces about 30% of the world's oil. When conflicts happen in this region, oil supply can be disrupted, causing international oil prices to rise. Korea depends almost 100% on oil imports, so when international oil prices go up, gas prices rise immediately.
Also, when there are unstable situations around the world, investors look for 'safe assets'. They usually prefer things like US dollars or gold. When many people want to change from Korean won to dollars, the won-dollar exchange rate goes up. The recent surge to 1,384 won happened for this reason.
There are several reasons why the financial sector entered emergency mode. First, Korean companies operating in the Middle East might face difficulties, so they need financial support. Second, the sudden rise in exchange rates could cause losses for banks' foreign currency holdings. Third, overall economic uncertainty increases, which could raise the risk of loan defaults.
When Hana Bank announced 11.3 trillion won in liquidity support, it means they will help companies operating in the Middle East avoid cash shortages in advance. This is a preventive measure to ensure companies don't face difficulties due to sudden changes in circumstances.
How does this affect ordinary people like us? First, gas prices will rise, increasing our fuel costs. Also, higher transportation costs could raise overall prices. Rising exchange rates make overseas travel more expensive and increase the cost of imported goods.
However, Korea has experienced several Middle East crises before and has handled them wisely each time. With the government and financial sector responding proactively, we can expect to manage the situation without major confusion.
2️⃣ Economic Terms
📕 Exchange Rate
An exchange rate is the ratio for exchanging money between two countries.
- A won-dollar exchange rate of 1,384 won means you need to pay 1,384 won to buy 1 dollar.
- When the exchange rate rises, it means the dollar becomes more expensive and the won becomes weaker.
- This leads to higher prices for imported goods and increased overseas travel costs.
📕 International Oil Price
International oil price refers to the price of crude oil traded in world markets.
- It's mainly based on West Texas Intermediate (WTI) and Brent crude oil prices.
- It changes due to Middle East political instability, supply disruptions, and economic conditions.
- Korea is heavily affected by oil price changes due to its high dependence on oil imports.
📕 Emergency Management
Emergency management is a special management system prepared for unexpected dangerous situations.
- It's a crisis management system that financial institutions activate to respond to market shocks.
- It includes 24-hour monitoring, emergency decision-making systems, and strengthened risk management.
- It's a proactive response measure for customer and market stability.
📕 Liquidity Support
Liquidity support means providing funds to companies or institutions facing cash shortages.
- It's done by banks providing loans to companies or increasing credit limits.
- It helps prevent companies from going bankrupt due to sudden cash problems.
- It's an important policy tool for financial system stability during economic crises.
3️⃣ How It Works and Economic Outlook
✅ Impact of Middle East Conflict on Korean Economy
Let's analyze the specific effects of Middle East regional instability on Korea's overall economy.
First, rising energy costs will appear across all industries. Korea depends on the Middle East for about 70% of its oil imports, so supply disruptions in this region directly hurt Korea. When international oil prices rise by $10 per barrel, Korea's annual energy import costs increase by about $15 billion. This leads to higher production costs in energy-intensive industries like petrochemicals, transportation, and electricity, weakening the overall economy's competitiveness. Large companies like Hyundai Heavy Industries and POSCO face higher production costs, which could eventually lead to price increases or reduced profitability. Small and medium-sized companies will face even greater difficulties because they can't easily pass on higher energy costs to product prices.
Second, the sharp rise in exchange rates will accelerate import inflation. If the won-dollar exchange rate exceeds 1,400 won, import prices are expected to rise by 5-7%. This directly translates to higher prices for daily necessities like food, clothing, and electronics, putting pressure on ordinary people's lives. Price increases will be particularly large for items with high import dependency. When prices of major grains like wheat, soybeans, and corn rise, the prices of bread, snacks, and animal feed also increase in a chain reaction. The risk of exceeding the Bank of Korea's target inflation rate of 2% is growing, which could also constrain monetary policy operations.
Third, global supply chain disruptions are expected to hit manufacturing. The Middle East region is also a key logistics hub connecting Asia and Europe. Instability in this region raises concerns about the safety of major maritime routes like the Suez Canal and the Strait of Hormuz. Global companies like Samsung Electronics and LG Electronics could face disruptions in parts procurement or finished product exports. Rising shipping costs and longer delivery times could weaken global competitiveness. Insurance premium increases are also expected to add to trade costs.
The economic ripple effects of Middle East conflicts go beyond simple energy price increases and could reveal structural vulnerabilities in the Korean economy. The importance of energy security and supply chain diversification is becoming more prominent.
✅ Financial Sector Crisis Response Strategy and Risk Management
Let's look at the emergency operations of major financial groups and their risk management measures.
First, foreign exchange risk management has become the top priority. The sharp rise in the won-dollar exchange rate could cause evaluation losses on banks' foreign currency assets. Banks with large foreign currency loans are particularly concerned about increased credit risk due to exchange rate fluctuations. Large financial groups like KB Financial and Shinhan Financial are minimizing exchange rate risk by increasing hedging ratios and adjusting foreign currency positions. They are also expanding provisions in preparation for rising delinquency rates among domestic companies operating in the Middle East. These banks are closely monitoring the cash flows of overseas companies and considering additional support measures when necessary.
Second, they are providing proactive liquidity supply to prevent corporate cash shortages. Hana Bank's plan to provide 11.3 trillion won in liquidity support is a preventive measure to ensure that companies operating in the Middle East don't face cash shortages due to sudden business environment changes. This is provided in the form of expanding existing credit limits, emergency working capital loans, and expanded trade finance support. Woori Financial Group is also strengthening field-focused support through local subsidiaries. They are particularly expanding customized financial services for companies in industries with high Middle East business exposure, such as construction, plants, and energy. This proactive response plays an important role in preventing corporate insolvency and maintaining financial system stability.
Third, they are minimizing systemic risk by strengthening integrated risk management systems. The Financial Supervisory Service and the Bank of Korea are operating a 24-hour monitoring system in cooperation with the financial sector. They have established a system that can track major financial indicators like exchange rates, interest rates, and stock prices in real time and respond immediately when abnormal signs are detected. Each financial group operates crisis management committees continuously, with CEO-level direct control enabling rapid decision-making. They are also conducting stress tests to calculate potential losses under various scenarios and preparing response measures in advance. This is a proactive crisis response system based on experience from the 2008 global financial crisis.
The financial sector's emergency system goes beyond simple defense and includes active response strategies that can turn crisis into opportunity. It serves to mitigate shocks to the entire economy by providing stable financial services to customers and companies even during crisis situations.
✅ Government Policy Response and Economic Stabilization Measures
Let's analyze the response policies of the government and related institutions and comprehensive measures for future economic stabilization.
First, strengthening energy security and utilizing strategic petroleum reserves is key. Korea currently holds about 96 million barrels of strategic petroleum reserves, enough for about 100 days of use. The government plans to release these to the market when necessary to stabilize oil prices. It is also expanding energy cooperation with non-Middle Eastern regions like the US, Norway, and Brazil to diversify energy supply sources. In the long term, it is pursuing policies to improve energy self-sufficiency by increasing the proportion of renewable energy and enhancing nuclear power utilization. Just as it has already expanded LNG import sources to include the US, Australia, and Russia, it plans to diversify crude oil supply chains as well.
Second, foreign exchange market intervention to stabilize exchange rates will be strengthened. The Bank of Korea and the Ministry of Economy and Finance are suppressing excessive exchange rate volatility based on $410 billion in foreign exchange reserves. They plan to mitigate shocks through market intervention, especially when rapid won weakness appears in the short term. They are also preparing liquidity securing measures through international cooperation such as Korea-US currency swaps and the Korea-China-Japan Chiang Mai Initiative. The government maintains the position of stabilizing the market through 'smoothing operations' when exchange rates move excessively beyond economic fundamentals.
Third, comprehensive livelihood measures for price stability are needed. To minimize the impact of rising oil prices on ordinary people's lives, they are considering policies such as reducing fuel taxes, freezing public transportation fares, and expanding energy vouchers. They also plan to ease import inflation pressure by reducing tariffs on essential goods or expanding quota tariffs. The Bank of Korea will maintain a balance between economic stimulus and price stability in monetary policy operations, but will prioritize price stability if the situation worsens. The government is also expanding policy finance support for companies operating in the Middle East and increasing export insurance coverage to reduce companies' overseas business risks.
The government's response takes a comprehensive approach that pursues both short-term shock mitigation and medium to long-term structural improvement. This is a time when structural improvements to enhance energy security and economic stability are needed, using the crisis as an opportunity.
4️⃣ In Conclusion
The economic shock from escalating Middle East conflicts once again highlights Korea's external dependency and structural vulnerabilities. With the won-dollar exchange rate surge and rising international oil prices occurring simultaneously, a double burden of import inflation and increased energy costs is expected.
Fortunately, domestic financial institutions and the government are taking proactive and systematic responses, so excessive confusion can likely be avoided. The activation of emergency systems by major financial groups and the 11 trillion won liquidity support plan will play important roles in preventing corporate cash shortages and maintaining financial system stability.
However, we must seriously accept the lessons this situation teaches us. An economic structure with high energy import dependency and high concentration in specific regions will always be vulnerable to external shocks. Therefore, it is urgent to strengthen energy security through energy supply source diversification, renewable energy expansion, and energy efficiency improvements.
Also, the cooperation shown by the financial sector and the government's rapid response during this crisis response process will be valuable experience that can be used in similar crisis situations in the future. In particular, the advancement of real-time monitoring systems and crisis management systems can be evaluated as having raised Korea's crisis response capabilities to the next level.
Individuals also need to prepare for such situations. It would be wise to prepare for increased living costs due to rising oil prices and adjust overseas travel or imported goods purchase plans according to exchange rate volatility.
Ultimately, this Middle East crisis is serving as an opportunity to remind us once again of the importance of economic security and the necessity of crisis response capabilities. We must build a more stable and sustainable economic foundation through short-term shock management along with long-term structural improvements.