South Korea considers extra budget to counter Middle East impact

SEOUL – South Korea will implement all available policy measures as needed, including a possible supplementary budget, to cushion the economy from the impact of escalating tensions in the Middle East, according to Finance Minister Koo Yun-cheol.

The government will consider extending fuel tax cuts while monitoring global oil prices and will respond swiftly if signs of instability emerge in the economy, Mr Koo said during an emergency economic meeting on March 11.

The authorities are also prepared to expand an existing market stabilisation programme worth more than 100 trillion won (S$86 billion) if needed.

The government and the Bank of Korea will coordinate additional measures such as emergency buybacks and outright purchases of government bonds to steady financial markets.

The remarks come as governments around the world consider how to deal with the fallout of the Iran war as it stretches to almost two weeks.

The International Energy Agency is mulling over the largest release of crude oil reserves in its history to tackle elevated prices triggered by the conflict, The Wall Street Journal reported.

About 70 per cent of South Korea’s crude imports typically pass through the Strait of Hormuz, making the country highly vulnerable to disruptions in the region. 

The government said it is closely monitoring energy markets and supply chains, though Mr Koo noted that the nation holds strategic oil reserves equivalent to about 208 days of consumption under IEA standards.

South Korean President Lee Jae Myung signalled a day earlier that Seoul may move towards an early supplementary budget to support small businesses and vulnerable companies if the crisis deepens.

Mr Lee said stronger-than-expected tax revenue could provide room for additional fiscal spending.

Economists say the government has policy space to curb the economic fallout from higher energy costs.

Mr Jeong-woo Park, an economist at Nomura Holdings, estimates Seoul could mobilise fiscal resources of up to 20 trillion won without issuing additional government bonds.

The government is also preparing measures to limit the pass-through of higher crude prices into consumer inflation, including extending fuel tax cuts and introducing a maximum retail price cap on petroleum products linked to global oil prices.

Mr Koo said the government will roll out the fuel price cap sometime this week and swiftly announce details, including the applicable fuel types and price benchmarks.

“We believe the extra budget would consist of fiscal cost for fuel tax cut and maximum price system for retail gasoline, as well as direct consumer support, including oil price-linked fiscal support for low-income workers and transportation industry, considering historical cases,” Citigroup economist Jin-Wook Kim wrote in a note on March 10. BLOOMBERG