Deputy Prime Minister and Finance Minister Koo Yun-cheol speaks at a briefing with accompanying reporters in Samarkand, Uzbekistan, on the 5th (local time), where the Asian Development Bank (ADB) Annual Meeting is being held. Photo courtesy of the Ministry of Economy and Finance
Deputy Prime Minister and Finance Minister Koo Yun-cheol pledged to defend Korea’s 2.0% economic growth target this year as tensions between the United States and Iran show no signs of easing, pushing the Middle East conflict toward a critical juncture for the Korean economy. He also signaled that the government may maintain its oil price cap system to counter surging crude prices.
Speaking to reporters on Monday in Samarkand, Uzbekistan, where the Asian Development Bank (ADB) annual meeting was held, Koo said it is “practically difficult to forecast the growth rate given the significant volatility in the Middle East situation,” but added, “We will achieve the initially promised 2.0% regardless.” Koo attended the ASEAN+3 (Korea, China and Japan) finance ministers and central bank governors meeting held on the sidelines of the ADB gathering. It marked the first time ministerial-level officials from major regional economies convened specifically to discuss the Middle East energy shock.
The Middle East war has already spread beyond domestic economic concerns to become a security variable. A Korean vessel caught fire in the Strait of Hormuz the previous day, and with U.S. President Donald Trump calling for military intervention, the Korean government now faces the task of simultaneously addressing energy prices, supply chains and security responses. On this matter, Koo remained measured, saying, “The cause of the fire is being investigated and security authorities will respond. Premature remarks from me could cause confusion.”
The government expects the prolonged Middle East war’s impact to materialize in earnest within about three months. “We saw it as around three months, and now it’s nearly been three months,” Koo said. This suggests the war’s shock has entered a phase of simultaneously pressuring growth, prices and fiscal burdens.
Still, Koo said it is not yet time to lower the growth target. “The semiconductor boom and strong stock market have led to favorable tax revenue conditions,” he said. “We will closely monitor and respond to rising fuel taxes, diesel and gasoline prices, and the resulting inflationary pressures.”
Regarding the oil price cap, he hinted at maintaining it until the Middle East situation stabilizes. “The most important factor is how quickly the Middle East war situation changes,” Koo said. “If oil prices continue above $100, we will need to respond with a combination of policies.”
Koo also cited the results of his urgently arranged meeting with the International Monetary Fund (IMF) Deputy Managing Director the previous day. “The IMF Deputy Managing Director assessed that Korea is performing exceptionally well as a model case,” he said. “Not many countries are doing this well.” The remarks underscore that while the United States struggles with surging oil prices, Korea has stably managed diesel and gasoline prices through measures such as the price cap. Koo effectively used the IMF’s assessment to bolster the legitimacy of the price cap and policy coordination.
On the Bank of Korea (BOK) keeping open the possibility of a rate hike, Koo said, “The Monetary Policy Board will decide by reflecting economic and market conditions,” adding, “If necessary, we will coordinate policies.” The arrangement is one in which, if the BOK shifts to tightening, fiscal authorities would absorb the shock to vulnerable groups and construction investment through fiscal measures. “We supported vulnerable groups through the first supplementary budget, and given the favorable tax revenue situation, we carried out a supplementary budget repaying 1 trillion won in government bonds,” Koo said. “Going forward, we will closely coordinate with the BOK, the Financial Services Commission and the Ministry of Planning and Budget.”
However, he drew a line on the possibility of a second supplementary budget. “At present, we need to focus on executing the first supplementary budget,” Koo said. “We are concentrating on the rapid execution of the 26.2 trillion won supplementary budget.” While simultaneously mentioning the defense of the 2.0% growth target and coordination on rate hikes, he distanced himself from additional fiscal injections, leaving the substance of the policy mix somewhat unclear, critics say.