(March 25): South Korea is stepping up contingency planning for a worst-case Middle East scenario, with Prime Minister Kim Min-seok warning that the government must strengthen its pre-emptive response systems as the conflict shows signs of persisting.
“With the situation likely to be prolonged, there is a need to further strengthen a pre-emptive, whole-of-government response system, including preparations for worst-case scenarios,” Kim told reporters on Wednesday. “The government will respond with utmost urgency in line with the gravity of the situation.”
The government will establish an emergency economic task force led by the prime minister that will operate as a cross-ministerial “one team”, Kim said. The group will meet twice a week for the time being to coordinate its response, while a separate emergency economic situation room will be established at the presidential office, he added.
Kim also urged swift passage of a supplementary budget, calling it “not a choice but a necessity” to shield the economy from risks. The move underscores how Seoul, heavily exposed to energy imports, is shifting into crisis mode as oil prices surge and supply risks intensify, with the Strait of Hormuz effectively closed to most traffic.
The government and ruling party agreed on Sunday to compile a roughly KRW25 trillion (US$16.7 billion or $21.4 billion) supplementary budget to be funded by stronger-than-expected tax revenues rather than through new bond issuance, as it seeks to support the economy without putting upward pressure on bond yields.
The South Korean won has slumped almost 4% this month to number among the worst performers in Asia. The benchmark Kospi has shed about 10%.
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The fiscal support is expected to focus on cushioning the impact of higher energy costs, supporting vulnerable households and stabilising supply chains. The government is expected to announce the details of the extra budget soon, after President Lee Jae Myung urged his team earlier this month to draw up a swift draft of the package.
Since the Iran turmoil, Seoul has already rolled out emergency measures, including imposing a fuel price cap for the first time in nearly three decades, as part of efforts to contain inflation pressures stemming from surging oil and gas prices.
Economists say the stimulus could provide a modest growth boost, but may also add to inflation risks in an already volatile environment.
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Citigroup Inc. economist Jin-Wook Kim estimates the proposed KRW25 trillion package comes to about 0.88% of gross domestic product, with the potential to lift growth by 0.18 to 0.35 percentage point over four quarters. Before news of the extra budget came to light, Citigroup had lowered its growth forecast for 2026 by 0.1 percentage point to 2.2%.
Without policy intervention, wholesale gasoline prices could jump sharply, potentially rising to about KRW2,050 per liter by late March from about KRW1,723 earlier this month, Citi said, adding the government is likely to cut fuel taxes to help offset the shock.
South Korea imports about 70% of its crude oil from the Middle East, leaving the economy particularly vulnerable to prolonged disruptions. A sustained supply shock could ripple through industrial inputs such as naphtha and urea, raising production costs, weakening exports and squeezing local demand.
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