As South Korean President Yoon Suk Yeol’s political future takes a dramatic turn after his short-lived martial law declaration, the country’s economy stands at a crossroads facing a number of uncertainties and risks.
How quickly the political uncertainty caused by the president’s martial law declaration and the opposition party’s push to take him down is resolved would affect the economy’s sovereign credibility and capital markets.
With gloomy economic projections from global institutions and domestic demand struggling to rebound, economic authorities are scurrying to reassure spooked investors.
Market experts believe an early presidential election following the passage of the bill to censure Yoon and the Constitutional Court’s decision to uphold impeachment would be a market-friendly scenario to steer a path through volatility.
Prolonged political impasse with impeachment failure
The lengthening of political instability draws a long shadow on the credibility of the economy and state policy banks and companies.
If investment sentiment freezes, demand for corporate bonds and publicly offered shares, the key funding channels for corporate finance, would plummet and prompt a liquidity crisis.
The faltering of state-run banks’ creditworthiness would squeeze the source of liquidity for Korean companies.
In the event of the financial markets' continuous volatility, the government may raise the size of treasury bonds, which would push the bond yield and result in a contraction of private investment and consumption.
Shinhan Securities predicted that the Kospi would stay downward, moving between 2,300 and 2,600 points if the ruling and opposition parties continue their standoff.
The Kospi is expected to experience a steep selloff equivalent to the onset of the COVID-19 pandemic in March 2020 and the peak of austerity in October 2023.
As tens of thousands of people continue their protests to support the embattled president or call on him to resign, consumer sentiment is expected to slide and inevitably take a hit on worsening domestic demand.
Government-led projects are projected to lose momentum, including the Corporate Value-Up Program, the gas and oil exploration project in the East Sea, the expansion of real estate supply and arms exports.
Yoon’s immediate removal and earlier election
Market analysts expect a new president and government would pursue economic stimulus through fiscal expansion policies.
“As the impeachment phase occurred during a period of economic slowdown, there’s a possibility that fiscal spending issues may be pushed down from a priority list,” said Kang Seung-won, an analyst at NH Investment & Securities.
Uncertainty would persist for about three months until the Constitutional Court finalizes its ruling on Yoon’s impeachment, but investors would feel a sense of relief due to the predictable timeline of the procedure.
The lapse of possibilities for additional martial law declaration by Yoon and the ease of political risk would elevate the valuation of Korean stocks.
Shinhan’s projection on this scenario is that the Kospi would move around 2,400 and 2,700 points.
“In past impeachment cases, the financial market responded by resolving uncertainty in the short term when the impeachment bill was passed and later showed a trend linked to the global economic cycle,” a Shinhan Securities official said.
During former President Park Geun-hye’s impeachment in 2016, the Kospi initially dropped during the height of political tension. But the process was more orderly and aligned with public demands for accountability.
For example, on Nov. 9, 2016, after Park refused to resign, the Kospi fell 3.61 percent in intraday trading. But when the National Assembly voted to impeach her on Dec. 2, the market barely moved -- investors had already priced in the likelihood of her removal.
