The recent spike in international oil prices to over $100 has triggered worries from credit rating agencies about the potential negative impacts on asset prices and financial markets.
On October 8, international oil prices surged to as high as $110 in New York and London futures markets, prompting credit rating agencies to express concerns over the potential collapse of asset prices and increased volatility in financial markets. The Korea Credit Rating Agency, on October 9, noted that industries such as petrochemicals, aviation, and construction would face significant negative impacts due to rising energy prices, increased cost burdens, and uncertainties in local project progress. Conversely, sectors like refining, private power generation, and defense may benefit from improved refining margins and heightened global security tensions arising from the ongoing conflict.
In the financial sector, the surge in oil prices is expected to amplify price volatility in domestic stocks, which could affect investment brokerage performance, derivative securities profitability, and asset management results. However, banks and insurance companies, which do not have a high proportion of stock investments within their assets, are projected to experience limited impacts. Particularly, even if oil price surges lead to increased currency exchange rate volatility, the financial sector is anticipated to remain largely unaffected due to low dependency on foreign capital procurement and the relatively small proportion of foreign assets.
Nonetheless, as currency exchange rates rise, the value of foreign assets may also increase, potentially leading to a mechanical rise in the risk-weighted assets for banks and a slight decrease in capital ratios. The Korea Credit Rating Agency predicts that a severe disruption in energy supply due to soaring oil prices under inflationary pressures could lead to significant differentiation in impacts across sectors, especially for non-banking financial institutions. These institutions may find it challenging to fully pass the increased procurement costs onto their clients, resulting in compressed operating margins and increased liquidity burdens, while rapidly rising interest rates could also elevate loan asset default costs and exacerbate valuation losses on held bonds, particularly if the ongoing conflict prolongs.
