As the war in Iran intensifies and the risk of a wider conflict grows, international oil prices have topped $100 a barrel and government bond yields are soaring. West Texas Intermediate crude jumped 6.7% in New York on the 10th to $102.48, its highest level since May. The surge came as the Houthi rebels, an Iran-aligned force, seized a chokepoint in the Red Sea while the Strait of Hormuz remained blocked, raising concerns of a double blow to global oil and logistics supply chains. Supply chain instability and inflationary pressure have also rattled financial markets. The yield on the 10-year U.S. Treasury note approached 5% and the 30-year yield climbed to a 19-year high, and as this global rate shock became reality, the yield on South Korea's three-year treasury bond broke above 4% on the 11th for the first time in two years and 10 months.
Hit by high oil prices and high interest rates, the Korean economy faces another wave of compound crisis. If prolonged inflation stemming from the Middle East increases pressure for rate hikes, the burden on households and businesses will inevitably grow. In that case, it is only a matter of time before financial instability from souring loans spreads to the real economy. It is also questionable how long the government can hold down an inflation rate that has already entered the 3% range even though the government has held down domestic fuel prices. If The Wall Street Journal's reporting is correct, the war is likely to turn into a prolonged war of attrition. Within the White House, officials are said to be discussing the possibility that the war continues until President Donald Trump's term ends in January 2029. The government cannot keep pouring money into holding down oil prices when there is no telling when they will settle. The European Central Bank raised its policy rate for the second time this year on the 10th and signaled that it would be difficult to reach its 2% inflation target by the end of next year.
To prepare for external risks that threaten the economy — a protracted war, global monetary tightening and U.S. tariff measures — the country needs the economic fundamentals that sound public finances support. If the government spends carelessly simply because nominal gross domestic product has risen and tax revenue has increased on the back of a semiconductor boom, and then exhausts even the fiscal room needed to reignite growth, sustainable growth will be out of reach and so will any response to a potential crisis. And yet, if the government channels half of the 45 trillion won (roughly $32 billion) future response fund into cash handouts and other uses that do not match its purpose, it amounts to tearing down the last line of defense for the national economy. To withstand prolonged global uncertainty, the government must build a solid fiscal breakwater and take every measure to manage risks in both the financial system and the real economy.
