Rising geopolitical risk tied to the Middle East is increasingly hitting South Korea’s financial markets with a double shock: a weaker won and higher inflation. With oil prices and the exchange rate climbing at the same time, pressure on consumer prices is building, raising concerns the path of the policy rate could shift and adding to strain across the financial sector.
According to the Korea Center for International Finance on Saturday, the average 2026 consumer inflation forecast from eight major global investment banks rose to 2.4% at the end of March from 2.0% at the end of February, an increase of 0.4 percentage points. Such a jump in the average outlook in just one month is unusual.
South Korea relies on the Middle East for about 70% of its oil resources, leaving it directly exposed to energy-price shocks. The won-dollar exchange rate moving above 1,500 won has also pushed up import costs. If the Middle East situation drags on, the Bank of Korea is expected to raise its benchmark rate once or twice in the second half of the year, which could increase interest burdens for households and companies and weigh on the real economy.
Those risks are also sharpening concerns about the soundness and profitability of financial holding companies and banks. If high rates and high inflation persist together, repayment capacity for households and businesses can weaken, lifting delinquency rates. The industry is watching closely for a buildup of potential bad loans, especially in sectors sensitive to the business cycle.
A higher exchange rate can also increase risk-weighted assets, adding pressure to manage common equity Tier 1 (CET1) ratios. The financial industry estimates that every 10-won rise in the won-dollar rate could lower financial groups’ CET1 ratios by about 0.01 to 0.03 percentage points. To offset that, groups are expected to step up loan-loss provisions and tighten risk-weighted asset management.
Funding costs are rising as well. While banks’ funding rates are climbing quickly due to higher market rates and intensifying competition for deposits, loan demand is showing signs of slowing as high borrowing costs combine with measures to manage household debt. With net interest income accounting for around 80% of financial groups’ earnings, a narrower net interest margin would translate into weaker profits.
Financial groups moved to emergency management systems soon after the Middle East crisis erupted and have stepped up risk responses. They shifted to real-time monitoring of exchange-rate moves and their impact, checked foreign-currency deposit liquidity, and focused on foreign-currency soundness management. They have also continued sending customer alerts to help clients navigate volatility in exchange rates and stock prices.
Annual business plans drawn up earlier are now likely to be revised. Plans were based on an expected average won-dollar rate of about 1,410 this year, but the March average was 1,492.5 won, the highest monthly level since the financial crisis. With market conditions deteriorating faster than expected, firms are being forced to review overall business strategies.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.