Korea Activates Supply Chain Fund Amid Oil Surge, But Rising Bond Yields Limit Firepower

The Korean government has activated its Supply Chain Stabilization Fund in response to surging international oil prices triggered by Middle East instability. However, analysts warn that persistently high domestic bond yields may constrain large-scale deployment of the fund.

The Ministry of Finance and Economy held a joint interagency meeting on Middle East developments on the 4th and announced corporate support measures. The Supply Chain Stabilization Fund is a policy fund designed to support companies when disruptions occur or may occur in the supply of key raw materials or components such as energy and minerals. Rather than accumulating reserves in advance, the fund raises capital through government-guaranteed public bonds and operates within an annual ceiling of 10 trillion won.

The government plans to activate an "Emergency Response Team for Supply Chain Fund" within the Export-Import Bank of Korea to expand funding limits for crude oil purchases from regions outside the Middle East, including North America and Latin America. It will also assess funding needs of companies affected by heightened oil price volatility and provide rapid financial support.

The challenge is that domestic bond yields have been running high recently, creating clear limitations on fund utilization. Large-scale deployment could increase supply pressure on the bond market.

Domestic bond yields have been rising since September last year, reflecting expectations of expanded policy financing following the new government's inauguration and projections of increased public enterprise bond issuance. The 3-year government bond yield, which had fallen to 2.253% on May 7 last year, rose to 3.267% on the 9th of last month. The 3-year Korea Electric Power Corporation bond yield, which had remained around 2.5%, also expanded to 3.586% over the same period.

The upward trend somewhat stabilized after the Bank of Korea indicated at last month's Monetary Policy Committee meeting that domestic bond yields were excessively high and left open the possibility of market stabilization measures if necessary.

However, with accumulated supply pressures, market rates have become volatile again amid growing stagflation concerns following the U.S.-Iran clash. The 3-year government bond yield surged 13.9 basis points in a single day on the 3rd, the first trading day after the Iran airstrikes. It recorded 3.223% on this day, up 4.3 basis points from the previous day, approaching its year-to-date high of 3.267%.

The government has begun adjusting issuance volumes in consideration of bond market pressure. The Ministry of Finance and Economy held the first meeting of the "Bond Issuing Institutions Council" last month, where major public bond issuers agreed to reduce first-quarter issuance by approximately 6 trillion won compared to initial annual plans. Government bond issuance this month will also be adjusted to minimum levels to ease market supply-demand pressure.

Market observers widely expect heightened rate volatility to persist for some time. Kim Sang-man, a researcher at Hana Securities, said, "It is difficult to predict at this point how long and how severe the impact and aftereffects of the Middle East situation will be."

Some suggest that tax support measures may be more effective than responding through public bond issuance. Kim Jung-sik, professor of economics at Yonsei University, said, "If bond issuance increases and liquidity expands, it could conflict with the government's real estate stabilization policies. Tax reduction policies such as fuel tax cuts could be a more direct response measure."

Meanwhile, the government has decided to strengthen its energy supply chain response system in preparation for Middle East instability. It plans to secure additional volumes from regions outside the Middle East, pursue imports of overseas production, and prepare measures according to emergency protocols including exercising priority purchase rights for joint stockpiles. Additional response measures including releasing strategic reserves will be considered if conditions deteriorate.

Support for crude oil purchase funds and emergency operating funds will also be expanded using the Supply Chain Stabilization Fund. The funding limit for crude oil purchases from regions outside the Middle East, including North America and Latin America, will be expanded from 90% to 100%, and rapid operating fund support will be provided to companies facing increased financial burden due to rising international oil prices.

Vice Minister Kang Ki-ryong of the Ministry of Finance and Economy stated, "We will spare no necessary support to help our companies smoothly secure alternative supplies and will respond preemptively to ensure domestic supply chains remain stable."