Lee Hyo-jin covers the Bank of Korea, the banking industry and broader financial news. Her previous beats include foreign affairs, North Korea and general reporting on Korean society.
Impact of extra budget uncertain amid Middle East crisis
Containers are stacked at a port in Pyeongtaek, Gyeonggi Province, March 12. Yonhap
By Lee Hyo-jin
Stimulus may ease energy burden but do little for growth, experts say
Surging energy prices and a series of downward revisions to Korea's growth outlook are raising questions about whether the government's planned 25 trillion won ($16.5 billion) supplementary budget will effectively cushion the economic fallout from the Middle East crisis.
Analysts said Sunday the package could help ease the immediate burden on households, but would have a limited impact on growth if external volatility persists and inflationary pressures continue.
The OECD last Thursday cut its 2026 growth outlook for Korea to 1.7 percent from its December projection of 2.1 percent, citing potential strains from the Iran crisis and rising energy costs.
Global investment banks have made similar revisions. Citibank recently lowered its forecast to 2.2 percent from 2.4 percent, while Barclays trimmed its estimate to 2 percent from 2.1 percent.
In a recent report, the Woori Financial Research Institute said that if international oil prices remain above $100 per barrel, Korea’s annual growth could fall by more than 0.5 percentage points given the economy’s heavy reliance on energy imports.
In response, the government is preparing an extra budget of 25 trillion won to offset the impact of higher energy costs.
The Ministry of Planning and Budget plans to submit the proposal to the National Assembly on Tuesday, with the ruling Democratic Party of Korea seeking its passage at a plenary session on April 9.
While details of the measures have yet to be disclosed, officials said the package will focus on easing the burden of high oil prices on households, with support concentrated on those most affected.
The authorities also said the budget would be financed without issuing additional government bonds, relying instead on higher-than-expected tax revenues, downplaying concerns about fiscal soundness.
Eggs are displayed at a supermarket in Seoul, Thursday, as the government said it would expand its list of closely monitored consumer prices to 43 key items, adding processed goods and service charges as part of emergency measures linked to the Middle East crisis. Yonhap
While analysts said the fiscal support could help ease the burden on households grappling with high oil prices and inflation, they raised doubts that it will significantly lift overall growth.
"With the Middle East conflict likely to be prolonged, a supplementary budget is effectively the only policy tool the government can use to immediately ease the burden on those most affected," said Jeong Se-eun, an economics professor at Chungnam National University.
"Targeted support is expected to help ease pressure on households, but it is unlikely to provide a meaningful boost to overall growth, especially as the impact of the Middle East crisis persists," she added.
Kim Dae-jong, a business administration professor at Sejong University, expressed a similar view, saying that the extra budget package appears appropriate in size and could help ease pressure on household finances if well targeted, but that excessive liquidity injection could add to inflationary pressure and weigh on overall growth.
"Fiscal policy will need to be coordinated carefully with the central bank's monetary stance amid expectations of a possible rate increase later this year," he said.
The main opposition People Power Party (PPP), meanwhile, criticized the supplementary budget plan, describing it as “cash handouts aimed at wooing voters ahead of the June 3 local elections.”
The party called for parliamentary questioning of the government before reviewing the proposal.
"In an emergency situation where inflation is high and exchange rates are volatile, the government's overreliance on a supplementary budget reflects an irresponsible policy stance that could deepen the crisis," PPP spokesperson Rep. Choi Bo-yoon said Sunday.