FSS Warns of Profitability Risks for Petrochemical and Aviation Sectors Amid Middle East Instability...Considering Loan Maturity Extensions for Vulnerable Industries

The Financial Supervisory Service has reviewed the potential impact of heightened oil price and exchange rate volatility, stemming from instability in the Middle East, on domestic industries such as petrochemicals, aviation, and shipping, as well as on the real economy. The agency also discussed preemptive response measures, including the extension of loan maturities for companies in vulnerable sectors.

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On March 10, under the leadership of Deputy Governor for Banking Affairs Kwak Beomjun, the Financial Supervisory Service held a meeting with industry analysts from the three leading domestic credit rating agencies-Korea Ratings, NICE Investors Service, and Korea Investors Service-to gather opinions on the impact that the Middle East situation may have on domestic industries.

The participants assessed that the recent escalation of tensions in the Middle East is disrupting global crude oil and natural gas supply chains. They warned that, if the situation becomes prolonged, it could serve as a significant risk factor affecting the overall business environment of major domestic industries.

In particular, they pointed out that Korea relies on the Middle East for about 70% of its imported crude oil, with more than 90% of this supply passing through the Strait of Hormuz. As a result, any potential blockade of the strait could undermine the stability of raw material procurement. Additionally, they noted that instability in the Middle East is strengthening a preference for safe assets in the global financial markets, and that growing concerns over inflation could sustain upward pressure on the won-dollar exchange rate.

By industry, the outlook was that the petrochemical sector could be significantly affected. Given the prolonged downturn in the industry, it will be difficult to fully pass on the sharp increases in raw material prices to sales prices, which is expected to erode profitability.

The aviation industry was also highlighted as being at risk, with rising fuel costs threatening profitability. Furthermore, due to the structural characteristic of paying a substantial portion of operating expenses in US dollars, a stronger dollar could further increase financial burdens.

The Financial Supervisory Service believes that if instability in the Middle East persists, liquidity risks could intensify due to deteriorating corporate performance, credit rating downgrades, and rising funding costs. The agency plans to closely monitor the status of major companies in vulnerable sectors through their main creditor banks and, if necessary, to consider proactive measures such as encouraging loan maturity extensions.

A representative from the Financial Supervisory Service stated, "We will continue to closely monitor developments in the Middle East and changes in the global financial market," adding, "We will maintain ongoing communication with the market and respond to risk factors that could affect domestic companies and the financial market."

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