SEOUL, Mar. 16 (AJP) - South Korea’s sovereign risk indicators are rapidly rising in line with the volatility in capital markets and exposure to oil supply disruptions, potentially further undermining foreign investor confidence in Korean securities.
South Korea’s five-year credit default swap (CDS) premium surged 23.83 percent in the past month, exceeding the gain of around 10 percent in China’s CDS and Japan’s remaining largely flat at around 1 percent, even when all three depend heavily on Middle East fuels through the crippled Strait of Hormuz.
Last Thursday, the price of South Korea’s CDS rose 4.52 percent to 27.9 basis points, the sharpest single-day increase among major nations, when oil prices hit $100 barrel amid jitters over the prolongment in the war in Iran.
Korea's risk premium has risen steeper than emerging markets like Turkey fighting inflation above 30 percent.
Among advanced economies, only Italy (30.68 percent) saw a steeper rise in swap rates. Italy’s spike was driven by its massive national debt—approaching 150 percent of GDP—and a widening spread against the German bund, the European benchmark.
South Korea’s total household debt reached 2,370 trillion won ($1.62 trillion) at the end of 2025, with a debt-to-income ratio of 174.7 percent. Italy’s trigger was its sovereign debt, which reached 3.13 trillion euros ($3.41 trillion) as of October 2025, or approximately 140 percent of its GDP.
Market analysts point to South Korea’s structural weaknesses. A heavy reliance on Middle Eastern crude oil, combined with high leverage, makes the economy hypersensitive to geopolitical "black swan" events.
Despite the pace of rise, it is still premature to be alarmed by the CDS level itself, authorities said.
"With the CDS premium still below 30 basis points, it is difficult to say it has moved outside the normal range," one Bank of Korea (BOK) official said, noting that the five-year CDS remains stable compared to the 2008 financial crisis or the 2022 shock following the invasion of Ukraine.
Still, the rapid rise in CDS could destabilize the bond market.
"Rising CDS premiums can increase volatility as they lead to expanded trading in government bond futures," said Kim Yong-gu, head of the Investment Strategy Team at Yuanta Securities Korea.
"We are already seeing increased trading volume in three-year bonds by foreigners, and if CDS continues to rise, that volatility could spread to 10-year bonds," he said.
A critical theme in common is the heavy dependence on the Strait of Hormuz. The narrow passage between the Persian Gulf and the Gulf of Oman is a strategically crucial choke point and is being impacted by the war.
More than 60 percent of South Korea’s oil imports pass through the strait, while Italy relies on it for up to 40 percent of its supply.
In a report explaining the KOSPI’s crash on March 5, the PRS Group highlighted South Korea’s 98 percent energy dependence and its 70 percent reliance on Middle Eastern crude. Any disruption in energy supply inevitably causes South Korea’s "risk premium" to skyrocket.
Experts warn that unlike Italy, South Korea faces greater risks because it does not use a reserve currency.
"Italy operates within the framework of the euro, a reserve currency, and is already included in the WGBI (World Government Bond Index)," one financial official said, speaking on condition of anonymity. "For South Korea, where there are talks of the won depreciating to 1,500, the situation could deteriorate much further."
As of Monday, the won traded at 1,496.9 per dollar, standing on the precipice of the psychological 1,500 barrier. While the three-year bond yield edged down 3.3 basis points, the 10-year yield rose 0.8 basis points to 3.709 percent, heightening fears of long-term stagnation.
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