Korea is preparing an emergency supplementary budget to counter an oil price shock triggered by the escalating conflict in the Middle East, as policymakers race to prevent rising energy costs and financial market volatility from weakening domestic demand, market watchers said Sunday.
The move comes as the country faces growing downside risks to growth from the surging oil prices.
Korea is one of the world’s most import-dependent energy consumers, which is why the shock is raising concerns that higher fuel costs could dampen consumer spending, raise business costs and erode economic sentiment.
President Lee Jae Myung ordered officials to move quickly on the extra budget, prompting the government to begin drafting the package immediately.
The government worked through the weekend to collect proposals from ministries, with the aim of submitting its plan to the Cabinet and then the National Assembly as soon as possible.
While the final size has not been set, policymakers and analysts expect the supplementary budget to range between 10 trillion won ($6.6 billion) and 20 trillion won.
Many say the government’s decision to move quickly on fiscal support may itself help stabilize sentiment at a time of heightened uncertainty.
The Korea Development Institute warned in its economic outlook early this month that higher oil prices linked to the Middle East conflict could become a significant downside risk for the economy.
Financial market turbulence is also adding to concerns about weakening domestic demand. Falling asset prices can erode the so-called wealth effect, potentially discouraging household consumption if investors see their financial assets decline.
So far, domestic sentiment indicators have yet to fully reflect the geopolitical shock, but overseas measures suggest a deterioration in confidence.
The University of Michigan’s U.S. consumer sentiment index fell to 55.5 in March from 56.6 the previous month, its lowest level since December.
The Korean government has signaled that the supplementary budget will focus on cushioning the impact of higher energy costs and stabilizing livelihoods.
Potential measures include energy vouchers for vulnerable households, support for small businesses and farmers facing higher fuel expenses, and assistance for transport and logistics firms hit by rising oil prices.
The inflationary impact of a supplementary budget is expected to be limited. The Bank of Korea said additional fiscal spending is unlikely to significantly raise inflation because the economy is operating below potential output.
“With real GDP still below potential, the likelihood that fiscal spending would sharply increase consumption or investment and push up inflation is relatively low,” the central bank said in a recent assessment.
The central bank estimates that a supplementary budget of roughly 15 trillion won could raise annual economic growth by around 0.1 percentage point, based on past cases.
The economic effects of the current situation will ultimately depend on whether the conflict becomes prolonged, the central bank said in a report to Rep. Cha Gyu-geun of the Rebuilding Korea Party.
“Decisions on the scale and necessity of fiscal stimulus will have to take into account how the crisis unfolds,” it said.