The News
As South Korean lawmakers navigate the political turmoil sparked by President Yoon Suk Yeul’s surprise martial law declaration Tuesday, the country’s already-shaky economy seems set for even more turbulence ahead.
Immediately following Yoon’s announcement, the iShares MSCI index, which tracks more than 90 large and mid-sized companies in South Korea, tumbled as much as 7%. The won fell to its lowest level against the US dollar since 2022. Both somewhat recovered Wednesday after Yoon lifted martial law. The Bank of Korea also promised to boost short-term liquidity to help stabilize markets following the debacle.
Still, investors are spooked by such a highly-advanced economy being suddenly susceptible to political upheaval, and analysts warned that the chaos could spill over into global markets.
SIGNALS
Yoon might have reversed decades of market valuation efforts
Seoul has been historically impacted from the so-called “Korea discount:” The country’s stocks are often valued lower relative to the assets their companies hold. Investors are wary of the country’s tensions with North Korea, and Seoul’s over-reliance on Chinese markets, Reuters wrote. President Yoon campaigned on eliminating that discount, but his move to plunge the country into political chaos “just dragged South Korea back to a past no global fund manager wanted to contemplate,” an Asia business journalist wrote in Nikkei, likely eliminating decades-worth of efforts by his predecessors to convince foreign investors to see Korean stocks as long-term prospects.
Political consolidation may reverse immediate financial hit
South Korea’s export-heavy economy would benefit from a “strong government” that balances the budget, stands up to US President-elect Donald Trump’s tariff threats, and navigates the downturn in the global auto industry, a Natixis economist told CNBC. Yoon’s potential impeachment could give the opposition party a chance to consolidate its power, having already won a legislative majority in April, a TS Lombard economist told Bloomberg. That would “trigger more expansive fiscal policy,” he noted. However, there is the potential that Yoon’s removal could reopen old trade disputes with Japan that he had resolved, the Japanese newspaper Mainichi argued, potentially spelling the end of Tokyo and Seoul’s “honeymoon period.”
South Korea’s crisis represents a test for other advanced economies
Yoon’s brief martial law order is “a reminder about the fragility of democratic institutions” that advanced economies depend on, investment news site Seeking Alpha wrote. “Rule of law is critical to investor confidence,” because it protects the intellectual freedom needed for innovation, UBS’ chief economist said, and a stable democracy is critical to counter China’s impact on the country’s economy, Financial Times columnist Leo Lewis argued. South Korea’s rapid economic advancement depended on globalization and a friendly world order, but today’s geopolitics could mean Seoul’s “best hopes rest on the US becoming maximally hostile to Chinese imports,” Lewis wrote, curbing their inflow to the East Asian country: “South Korea cannot afford to crash.”