Korea Activates Supply Chain Fund as Oil Prices Surge Amid Middle East Tensions

The government has activated its Supply Chain Stabilization Fund to prepare for potential raw material supply disruptions as international oil prices surge amid Middle East instability. However, concerns are emerging that rising domestic bond yields could constrain the fund's actual deployment, given that its resources are raised through public corporation bond issuance.

The Ministry of Finance and Economy held a joint inspection meeting with related agencies on the Middle East situation on the 5th and announced corporate support measures to address raw material supply instability. The government plans to expand financial support using the Supply Chain Stabilization Fund to prepare for potential supply disruptions of key raw materials including energy and minerals.

The Supply Chain Stabilization Fund is a policy fund established to support companies when disruptions occur or may occur in the supply chains of key raw materials and components. Rather than accumulating resources in advance, the fund operates within a maximum annual limit of 10 trillion won through government-guaranteed public corporation bond issuance.

The government decided to activate the "Supply Chain Fund Emergency Response Team" within the Export-Import Bank of Korea to expand funding support for crude oil purchases from regions outside the Middle East, including North America and Latin America. The policy is to identify funding needs of companies affected by increased international oil price volatility and provide necessary funds promptly.

However, concerns are emerging that the fund's utilization capacity is constrained as bond yields continue to rise. Large-scale deployment could increase supply pressure on the bond market since the fund's resources are raised through public corporation bond issuance.

Domestic bond yields have been on an upward trend since the second half of last year, reflecting expectations of expanded policy financing and increased public enterprise bond issuance following the new administration's launch. 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. During the same period, the 3-year Korea Electric Power Corporation bond yield also expanded from around 2.5% to 3.586%.

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

However, with accumulated supply pressure, market rates are fluctuating again as stagflation concerns grow 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 the year-high of 3.267%.

The government has also begun adjusting issuance volumes considering 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 early-year plans. Government bond issuance this month will also be adjusted to minimum levels to ease market supply-demand pressure.

Market observers note that rate volatility is likely to continue for the time being. 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 could be more effective than responding through public corporation 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," adding that "tax reduction policies such as fuel tax cuts could be a more direct response measure."

The government also decided to strengthen its energy supply chain response system. It plans to secure additional volumes from regions outside the Middle East, pursue imports of overseas production, and prepare measures following emergency protocols including exercising preferential purchase rights for joint stockpiles. If the situation worsens, additional response measures including releasing strategic petroleum reserves will also be considered.

The government also decided to expand crude oil purchase funding and emergency operating fund support using the Supply Chain Stabilization Fund. The plan is to increase the funding support limit for crude oil purchases from regions outside the Middle East, including North America and Latin America, from the existing 90% to 100%, and to promptly provide necessary operating funds to companies facing increased financial burden due to rising international oil prices.

Vice Minister Kang Ki-ryong of the Ministry of Finance and Economy said, "We will provide necessary support so that our companies can smoothly secure alternative supplies."