Middle East Crisis Rattles Markets; Swift Response Needed on Financial, Oil Volatility

The "Middle East risk" stemming from U.S.-Israeli airstrikes on Iran and Iran's retaliatory response has delivered a megaton-level shock to domestic stock and foreign exchange markets. The stock market is reeling from Iran-triggered "Black Tuesday."

The KOSPI, which had breached the 6,300 level, plunged 7.24% to 5,791.91 on the 3rd as foreign investors dumped shares for profit-taking. This marks the lowest level since the 20th of last month. The KOSDAQ also fell 4.62% to 1,137.70. The won-dollar exchange rate surged 26.4 won to 1,466.1 won. Dubai crude jumped nearly 7%, breaking through $76 per barrel. The massive external shock from Iran is causing uncontrollable chaos in domestic stock markets, exchange rates, and oil prices.

The bigger problem is the growing likelihood that the Iran situation will become prolonged. U.S. President Donald Trump signaled a protracted conflict on the 2nd, stating, "I expected it to take four to five weeks, but we have the capability to sustain it longer." Iran's Islamic Revolutionary Guard Corps (IRGC), which has vowed to fight to the death against America, countered with threats of a maritime blockade, declaring, "We will burn every vessel passing through the Strait of Hormuz." Global economic analysis agencies have projected that if the Iran crisis drags on, international oil prices could surge to $100 per barrel and global inflation could jump 0.7 percentage points. The Korea International Trade Association has forecast that international shipping rates could spike 80%.

The Middle East crisis is tantamount to a "ticking time bomb" for Korea's export-driven economy. While major countries' stock markets declined only 2-3%, the KOSPI's 7% plunge may indicate that Korea has been identified as the "weak link" in the Middle East crisis. The external compound shock from the Middle East threatens to trigger inflation, deteriorating export conditions, won depreciation, and investor flight, potentially jeopardizing even this year's 2% growth target.

The government must move quickly to reduce market anxiety. It should establish a cross-ministry control tower and immediately activate contingency plans. Details and timing of the "100 trillion won-plus" market stabilization program must be announced promptly to ease financial market instability and prevent the shock from spreading to the real economy. Package support through policy financing should be considered for export companies facing temporary business difficulties. Rather than resting on 200 million barrels (221 days' worth) of strategic petroleum reserves, the government must expedite crude supply consultations with Saudi Arabia and other countries. Now is the time to prepare so thoroughly that "the market considers it excessive."