South Korea exports remain higher and grow faster despite escalating Iran volatility

In March, South Korea's exports kept rising as strong demand for semiconductors supported the country's economy despite growing external concerns due to the Iranian conflict.

According to figures supplied by the Customs Service, the value of exports adjusted for working-day variations increased by 41.9% over the previous year. A $25.74 billion trade surplus resulted from an increase in imports of 13.2% and an increase in unadjusted exports of 48.3%, as opposed to a revised 28.7% gain for the entire month of February.

Due to ongoing international investment in data centres and artificial intelligence, semiconductors continued to dominate overall exports. According to the data, despite growing challenges from rising energy prices and geopolitical unpredictability, South Korea's export engine appears to be intact for the time being.

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In an economy that is largely dependent on foreign energy supplies, the conflict in Iran has increased the price of crude oil, driving up import costs and increasing the risk of inflation.

President Lee Jae Myung's administration has already proposed an additional budget of 26.2 trillion won ($17 billion) to support consumers and businesses, including measures to mitigate high fuel costs and aid low-income households and small business owners, in an effort to lessen the secondary economic impact of the Middle East crisis.

For the time being, the Bank of Korea's cautious policy stance may be supported by the continued strength of exports as policymakers weigh growing risks to financial stability against still-solid external demand.

Although the central bank stated last month that the financial system is still generally stable, it cautioned that rising tensions resulting from the Iranian crisis could cause volatility in asset and currency markets.

Lee Soohyung, a member of the BOK board, pointed out that although uneven development and stricter funding conditions burden vulnerable industries, increasing the possibility of credit stress, increased energy costs could boost inflation.

The central bank will be in a difficult situation if the Middle East turmoil hinders growth and increases inflation. On April 10, Governor Rhee Chang Yong will make his final rate decision before Hyun Song Shin, his nominee, takes over. Markets are keeping an eye on whether inflation risks could eventually lead to a more hawkish change in policy.