The government has decided to execute more than 85% within the first half of this year of livelihood-focused programs in the supplementary budget, such as high oil price damage support payments·energy vouchers·public transportation fare refunds. It is accelerating budget execution to mitigate the economic shock from the war in the Middle East, but there are concerns that if cease-fire talks between the United States and Iran do not proceed smoothly and the Middle East situation drags on, there will be limits to responding with fiscal measures alone. Diversification of supply chains and efforts to improve energy efficiency are also cited as tasks.

According to the Ministry of Planning and Budget on the 12th, the government has classified 10.5 trillion won out of the total supplementary budget (26.2 trillion won) as subject to rapid execution, and plans to execute at least 85% of that within the first half. The rapid-execution items include livelihood-linked programs such as high oil price damage support payments·energy vouchers·public transportation fare refunds, as well as supply-chain measures such as support to stabilize naphtha supply·equity contributions to the petroleum stockpiling project.

High oil price damage support payments and energy vouchers for vulnerable households will be disbursed in stages starting in April, and public transportation fare refunds will take place in May. To revitalize the culture·tourism industries, support will begin with discounts for films·performances in May, followed by lodging in June.

For support for alternative imports of naphtha, beneficiary companies will be selected in April, and the stockpiling fund for the petroleum stockpiling project will receive a full capital contribution within the first half. The government will check execution status every two weeks on a rolling basis to deliver early effects for stabilizing livelihoods and responding to the economy.

For now, the government assesses that this supplementary budget secures room to cope with ‘direct shocks’ for about three months and with indirect shocks for around six months, but the issue is what comes next. As cease-fire negotiations between the United States and Iran run into difficulties, economic uncertainty is growing again. If the Strait of Hormuz again enters a blockade phase, the effects of the supplementary budget could be quickly offset.

South Korea relies on the Middle East for about two-thirds of its crude oil·naphtha imports, so a blockade of the strait is expected to lead directly to shipping delays and soaring freight rates. Not only would the oil·chemical industries take a direct hit, but a vicious cycle of higher domestic prices and manufacturing production costs across the board would also be unavoidable.

It is also a burden that, amid heightened geopolitical risk, the won-dollar exchange rate, which was around the 1,400-won range at the start of the year, is climbing steeply. A weaker won reduces the real purchasing power of consumers and, at the same time, fuels higher raw material prices, potentially leading to deteriorating profitability for small and midsize manufacturing·export companies.

International organizations and global investment banks are also sounding the alarm. World Bank President Ajay Banga said in an interview with Reuters on the 10th (local time), “If the war continues, the inflation impact will be much larger, potentially rising by as much as 0.9 percentage point.” Goldman Sachs analyzed that if a blockade of the Strait of Hormuz continues for another month, Brent crude prices could exceed $100 per barrel by the end of the year.

Major countries are moving to prepare measures for a prolonged war. China plans to suspend all sulfuric acid exports starting in May to respond to supply disruptions originating in the Middle East. As sulfuric acid is a key input for fertilizer production, there are concerns this could spill over into higher international food prices. France has shifted course by expanding support for electric vehicles in place of short-term fuel subsidies, and Germany is simultaneously discussing imposing a windfall tax on energy companies and cutting fuel taxes.

Against this backdrop, experts argue that, in addition to the government focusing on fiscal execution, companies must also pursue supply chain diversification and energy efficiency. With the prospect that the war could be prolonged, the country needs to build up its ‘economic resilience’. An official at a state-run research institute emphasized, “Considering that oil prices are unlikely to return to pre-war levels in the short term, it is time to examine comprehensive measures to improve the economic structure, including energy transition.”