A visitor looks at a screen at the Korea Exchange (KRX) headquarters in Seoul, South Korea, Wednesday, Dec. 4, 2024.
Bloomberg | Bloomberg | Getty Images
Analysts say an extraordinary political drama in South Korea could exacerbate already bleak prospects for Asia’s fourth-largest economy, although some see reason for greater optimism if a deeper crisis can be avoided.
South Korean President Yoon Seok-yeol suddenly announced plans to impose emergency martial law on Tuesday night, citing the need to protect the country from North Korea’s “communist forces” and eliminate “anti-national forces.”
The shocking announcement was widely seen as a response to domestic pressure but was rescinded hours later. Yoon decided to revoke the order after nearly 200 lawmakers forced their way into the National Assembly and voted unanimously to block the move.
The political fallout has thrust South Korea, a key U.S. ally and key link in international supply chains, into the global spotlight and roiled financial markets.
U.S.-listed South Korean stocks fell sharply after Mr Yoon initially issued martial law, while the won hit a two-year low against the dollar. The currency has since recouped most of its losses.
Shortly before markets opened on Wednesday, Vice Minister of Economy and Finance Kim Byung-hwan said regulators were ready to deploy 10 trillion won ($7.06 billion) “at any time” to stabilize the stock market, South Korea’s Yonhap News Agency reported. report.
South Korea’s Kospi closed down 1.44% on Wednesday as opposition lawmakers launched impeachment proceedings against Yoon, narrowing losses earlier in the day by more than 2%.
“We are currently in a much calmer situation, but given South Korea’s importance to global supply chains, it is still something we need to watch,” Deutsche Bank strategists said in a research note released on Wednesday.
What’s next for the Korean stock market?
Jonathan Garner, Chief Asia and Emerging Markets Equity Strategist Morgan Stanley told CNBC’s “Street Signs Asia” on Wednesday that the Wall Street bank was underweight South Korean stocks.
“Our view on the Korean market is that it is not that well-positioned amid the global economic slowdown, especially as one of the most trade-exposed markets and regions that we cover, all tariff and non-tariff Problems are happening,” Garner said.
He continued: “Also, the semiconductor cycle is starting to trend downward, and in addition, there is considerable damage globally to the automotive industry, which has a large share of the Korean market.”
“Even before these recent events, our economists expected South Korea’s economic growth to slip below 2% next year, one of the sharpest slowdowns we have seen globally.”
Shares of technology giant Samsung, South Korea’s largest company, fell 1% on Wednesday, while battery maker LG Energy Solution and carmaker Hyundai Motor fell 2.8% and 2.4% respectively.
Rory Green, chief China economist and head of Asia research at TS Lombard, said in a research note released on Wednesday that Korean assets and interconnected markets, especially Asian foreign exchange markets, are likely to continue to experience negative trends. Price movements and volatility.
South Korea’s won last traded at 1,414.22 against the U.S. dollar, depreciating to 1,444.93 on Tuesday, the lowest level since October 2022, London Stock Exchange data showed.
Trinh Nguyen, senior economist at Natixis, said Yin’s push to declare martial law was a “very, very bad decision” and a blow to South Korea that was ill-timed.
Nguyen told CNBC: “Martial law has not been implemented since 1979 and is considered very negative. So the reversal of martial law is positive. However, it brings a lot of political uncertainty, especially President Yoon’s future.
“This is not a positive moment for South Korea, right? The wafer cycle is in the doldrums, you can see exports are contracting in October, (the Bank of Korea) had to cut interest rates (and) domestic demand is quite weak,” she continued.
“So we really need a strong government with a budget that not only provides financial support in the short term, but also deals with the challenges from China and potential tariffs in the long term,” Nguyen said.
Investor sentiment may improve
Not everyone is pessimistic about the impact of the political drama unfolding in South Korea on markets.
“First, new reports suggesting that Yin will be impeached or resign soon may help investors,” Thomas Mathews, head of Asia-Pacific markets at Capital Economics, said in a note. Drawing further boundaries.
He added: “Presidential impeachments in South Korea are not unprecedented, and at least in the most recent impeachment in 2016/2017, the country’s stock market ended up doing well.”
A man watches South Korean President Yoon Suk Yeol’s speech on television at a train station in Seoul on December 3, 2024, after he declared emergency martial law, saying the step was to protect the country from “communist forces” The encroachment required parliament to debate the budget bill.
Anthony Wallace | AFP | Getty Images
While Matthews acknowledged the chaos comes at a challenging time for South Korea, the Capital Economics team said there was reason to be more optimistic as long as a deeper crisis could be avoided.
“After all, South Korea’s big tech companies are generally well-positioned to benefit from the current broader enthusiasm for artificial intelligence and technology. So if investor sentiment about the country does eventually improve, we think it could improve significantly. ,” Matthews said.
“But first there may be more water flowing under the bridge,” he added.
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