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South Korea's Political Turmoil and Economic Impact

General Report January 8, 2025
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TABLE OF CONTENTS

  1. Summary
  2. Political Turmoil and Martial Law Declaration
  3. Market Reactions and Economic Impact
  4. Institutional Responses to Economic Instability
  5. Long-term Economic Concerns
  6. Conclusion

1. Summary

  • President Yoon Suk Yeol's recent declaration of martial law in South Korea has instigated a wave of political unrest and economic unpredictability. This move, though swiftly retracted, has set off significant alarm within the financial markets, reflecting a decline in both the KOSPI and KOSDAQ indices. These declines were paralleled by considerable depreciation in the South Korean won, exacerbating concerns about the broader economic outlook. The chaos has further elucidated the sensitive relationship between political actions and economic stability, as evidenced by the stark market reactions. Financial institutions, including the Bank of Korea, have responded with emergency liquidity measures, showcasing coordinated efforts to quell financial instability. Moreover, investor sentiment has been heavily impacted, with potential long-term implications for South Korea's credit rating looming on the horizon.

2. Political Turmoil and Martial Law Declaration

  • 2-1. President Yoon Suk Yeol's declaration of martial law

  • On December 3, 2024, President Yoon Suk Yeol announced martial law in South Korea, citing threats from pro-North Korean factions aimed at destabilizing the country. This declaration was unprecedented and sparked significant unrest among lawmakers and investors. Following the declaration, troops were mobilized to surround the National Assembly, causing alarm within the country. However, just six hours later, due to the political backlash and serious constitutional concerns, Yoon retracted the martial law declaration.

  • 2-2. Immediate retraction and political backlash

  • President Yoon's rapid retraction of the martial law declaration did not quell the unrest; rather, it intensified the political backlash. In response, various opposition lawmakers swiftly moved to introduce impeachment proceedings against Yoon, signaling strong disapproval of his administration's decision. This resulted in resignations from several senior officials within the government, suggesting significant fractures within Yoon's political circle and mounting pressure on his administration.

  • 2-3. Opposition responses and calls for impeachment

  • The opposition, particularly from the Democracy Party, organized a coalition to push for impeachment proceedings against President Yoon following his controversial declaration of martial law. They viewed his actions as a severe overreach that undermined South Korea's democratic processes. This political turmoil not only sparked calls for impeachment but also raised concerns over the stability of the government and its future direction amidst ongoing public and political scrutiny.

3. Market Reactions and Economic Impact

  • 3-1. Stock market declines (KOSPI and KOSDAQ indices)

  • The recent declaration of martial law by President Yoon Suk Yeol led to significant declines in South Korea's stock market on December 4, 2024. The KOSPI index dropped by 1.44%, closing at 2,464, while the KOSDAQ index experienced a steeper decline of 1.98%, ending at 677.15. This volatility occurred amid heightened political tensions, including calls for the President's impeachment and unrest among lawmakers and investors. An ETF that tracks over 90 South Korean companies fell as much as 7% before recovering to a decline of approximately 1.6%, demonstrating the direct impact of the political crisis on investor confidence.

  • 3-2. Impact on major corporations (e.g., Samsung, LG Energy)

  • Major South Korean corporations have faced considerable disruptions due to the ongoing political turmoil. Samsung Electronics saw its stock price drop by nearly 1%, while LG Energy Solution experienced losses of 2.8%. The actions taken by President Yoon, including the declaration and rapid retraction of martial law, have fueled concerns about the future operational performance of these companies and the overall stability of the South Korean economy.

  • 3-3. South Korean won's decline against the US dollar

  • The South Korean won has shown signs of decline against the US dollar, reaching lows not seen since 2022. After the declaration of martial law, the won dropped to 1,420 per dollar, reflecting a broader instability in the financial markets. Analysts have suggested that due to the political uncertainty and additional pressures such as trade tensions between the U.S. and China, the won could further weaken to around 1,450 against the dollar. Interventions by South Korean authorities to stabilize the currency included selling U.S. dollars in the onshore market to limit the decline.

4. Institutional Responses to Economic Instability

  • 4-1. Bank of Korea's emergency liquidity measures

  • In response to the immediate economic instability following President Yoon Suk Yeol's declaration of martial law, the Bank of Korea convened an emergency board meeting. During this meeting, they decided to inject short-term liquidity into the markets to stabilize economic conditions. This included a promise to offer special loans as needed to ensure the smooth functioning of the market. The swift action demonstrated the central bank's serious concerns about the potential for financial instability that could arise from the political turmoil.

  • 4-2. Financial regulators' commitment to market stabilization

  • South Korea's financial regulators expressed a strong commitment to ensuring market stability during the ongoing political crisis. They announced their readiness to deploy up to 10 trillion won (approximately $7.07 billion) for market stabilization efforts. This announcement came shortly after the Bank of Korea's declaration of emergency measures, signaling a coordinated response among various financial authorities. The assurance from regulators highlights an understanding of how critical it is to uphold economic confidence amidst a backdrop of political unrest.

  • 4-3. International reactions and regional market effects

  • The political crisis in South Korea and the subsequent declaration of martial law had notable effects beyond the domestic market. Regional markets across Asia reacted negatively, showcasing the global interconnectedness of financial markets. Notably, Japan's Nikkei 225 index closed nearly flat while China's CSI 300 index saw a decline of 0.54%. The sentiment among investors was characterized by uncertainty, as the South Korean won experienced significant vulnerability, prompting concerns about its value potentially weakening to around 1,450 won against the US dollar. This environment reflected heightened awareness and caution from global investors as they monitored the unfolding political situation in South Korea.

5. Long-term Economic Concerns

  • 5-1. Investor confidence and potential credit rating impacts

  • The recent political turmoil, particularly President Yoon Suk Yeol's declaration of martial law, has raised significant concerns about investor confidence in South Korea. Analysts indicate that these events could negatively impact South Korea's sovereign credit rating. Min Joo Kang, an economist at ING Economics, expressed this concern, highlighting the historical context wherein the 2017 impeachment of former President Park Geun-hye led to a decline in consumer and business sentiment, which subsequently slowed economic activity.

  • 5-2. Historical parallels with previous political crises

  • The current political crisis has drawn comparisons to the past political turmoil in South Korea, particularly the impeachment of former President Park Geun-hye in 2017. The aftermath of that crisis saw significant impacts on both consumer and business sentiment, which contributed to a downturn in economic activity. The quick declaration and subsequent lifting of martial law under President Yoon's administration has also stirred investor fears of a repeat scenario, potentially leading to similar negative economic outcomes.

  • 5-3. Broader geopolitical implications for South Korea

  • The recent martial law declaration not only affects South Korea's internal political landscape but also contributes to broader geopolitical instability. Analysts have warned that the uncertainty in South Korea affects not just local markets but also investor confidence globally, as political insecurities in one nation often have rippling effects across international markets. The significant decline in the South Korean won by as much as 3% against the US dollar in response to these events illustrates how intertwined South Korea's economic environment is with the global market dynamics.

Conclusion

  • The crisis in South Korea, spurred by President Yoon Suk Yeol's martial law declaration, underscores the delicate balance between political dynamics and economic vitality. The swift downturns in the KOSPI Index and the depreciation of the South Korean won serve as stark reminders of this interconnection. While financial entities like the Bank of Korea have acted promptly to stabilize the market, the lingering political uncertainties suggest a cautious path forward for investors and policymakers alike. The martial law incident not only heightens internal political discourse but also impacts geopolitical perceptions, potentially influencing regional and global market sentiments. Despite proactive measures, the potential for enduring economic instability highlights the necessity for sustainable political solutions to restore investor confidence and optimize economic performance in South Korea. As these events unfold, they present crucial lessons on the importance of governance in maintaining both national and economic security.

Glossary

  • Yoon Suk Yeol [Person]: Yoon Suk Yeol is the President of South Korea, whose recent decisions, including the declaration of martial law, have triggered political unrest and market volatility. His actions have raised questions about governance and the impact on South Korea's democracy and economy, making him a central figure in the current political crisis.
  • KOSPI Index [Market Index]: The KOSPI Index is the main stock market index of South Korea, representing a key barometer of investor confidence and economic performance. Its decline during the political crisis illustrates the immediate financial ramifications of political instability.
  • South Korean Won [Currency]: The South Korean won is the official currency of South Korea, which has faced significant depreciation against the US dollar due to the political crisis. This decline highlights the currency's vulnerability to political events and external economic pressures.

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