Mideast tensions test Korea's fragile recovery
Volatility spikes, but analysts expect limited impact unless conflict escalates further
Rising global volatility from Middle East tensions poses fresh risks for South Korea's export-driven economy, stoking fears of supply disruptions. Still, analysts expect the impact to remain limited unless the conflict escalates further.
Oil prices surged after Israel launched airstrikes on Iran on Friday, followed by retaliatory attacks over the weekend. Brent crude spiked more than 10 percent intraday — its biggest move since 2022 — before closing up 7 percent. West Texas Intermediate gained 7.62 percent.
Korea, already grappling with sluggish growth and rising external headwinds, reacted swiftly. The benchmark Kospi snapped a seven-day winning streak Friday, reversing from early gains to close lower amid the geopolitical shock.
'A prolonged surge in oil prices could further jeopardize growth, which is already projected to fall below 1 percent this year,' said Jung Kyu-chul, head of economic forecasting at the state-run Korea Development Institute.
'Higher oil prices will squeeze manufacturers by raising import and production costs, delivering a direct blow not just to industry, but to domestic demand and the broader economy.'
The timing of the shock was especially sensitive. Korea had only recently shown signs of market recovery following the June 4 inauguration of President Lee Jae-myung, which ended a six-month political vacuum. Investors had hoped the new administration would bring policy clarity and revive momentum amid rising US protectionism and weak domestic demand.
In May, Korean exports declined for the first time in four months. First-quarter gross domestic product also contracted 0.2 percent, with analysts warning that deepening trade friction could continue to weigh on the real economy.
Buoyed by optimism over political stability and a potential policy reset, the Kospi jumped nearly 11 percent from May 12 — the strongest monthly gain among G20 markets, far outpacing runner-up Indonesia's 4.8 percent rise. The rally was fueled by foreign investors turning net buyers for the first time in 10 months, snapping up 4.9 trillion won ($3.58 billion) just in the past two weeks.
But Friday's geopolitical shock reverberated across markets. The Kospi fell 0.87 percent to close at 2,894.62, pulling back after hitting a three-year high of 2,920 the previous day.
The Korean won weakened sharply, slipping to an intraday low of 1,371 won per dollar before settling at 1,369.6 won.
Safe-haven demand surged, with gold climbing 1.6 percent to $3,457 an ounce in New York. In Korea, gold prices rose 2.34 percent to 150,530 won per gram, breaching the 150,000-won threshold for the first time since early May.
Yet, many analysts see the risk to the Korean economy as temporary.
Kim Sang-bong, an economics professor at Hansung University, downplayed the broader impact of the recent oil price gains. 'Oil is still relatively cheap, hovering around $70 a barrel. Even with a modest rise, the economy is unlikely to suffer serious fallout,' Kim said. 'While energy costs do present short-term pressure, Korea's fundamentals remain strong enough to absorb the shock. A more pressing concern is the uncertainty around US tariffs.'
Korea and the US are in ongoing talks to renegotiate trade terms, with Washington temporarily deferring new tariff measures until early next month.
Local markets are expected to hold steady unless the conflict deepens, analysts said.
'As long as the Israel-Iran conflict doesn't evolve into a full-scale war, the impact on local markets is likely to remain limited,' said Shin Seung-hwan, analyst at Samsung Securities. 'Given the recent steep rally, the tensions could prompt a short-term correction, but any pullback is expected to remain modest.'
Still, with no signs of de-escalation so far, caution is warranted. 'We need to stay alert to deepening geopolitical tensions,' said Lee Jae-won of Shinhan Securities. 'If oil and other commodity prices continue to climb, that could fuel inflationary pressure and dampen expectations for rate cuts.'
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