.png){kind=logo}
South Korea's financial markets tumbled into chaos after President Yoon Suk Yeol suddenly declared martial law on December 3, 2024, amid political drama. However, he quickly lifted it on December 4, around 4:30 a.m., during a Cabinet meeting, under mounting political pressure.
The sudden turmoil caused the South Korean Won to fall steeply, hitting a two-year low. The sharp decline prompted emergency stabilization measures from the government and the Bank of Korea (BOK).
South Korea was placed under martial law for the first time in more than 40 years. Escalating political tensions led to the move. The main reason behind the imposition was President Yoon Suk Yeol's administration facing multiple opposition challenges after losing parliament control.
Yoon branded the Democratic Party as performing "anti-state activities" and trying to disrupt the government's functioning. This martial law declaration is understood to be a response to challenges in the form of impeachment motions and budget proposals that undermined Yoon’s authority.
The South Korean martial law declaration was controversial and evoked fears of a return to military rule or dictatorship.
The combination of political unrest and fiscal gridlock has accelerated the ‘Korean Discount’, meaning discounted valuation of equities in South Korea.
1. KOSPI index fell by 2.02%, close to 2,449.66.
2. The iShares MSCI South Korea ETF declined 1.6% in overnight US trading.
3. The won will continue to be under pressure, moving up to 1,450 over the coming months, writes Alvin Tan at RBC Capital Markets.
This uncertainty spilled out into broader Asian stock markets. In Japan, the Nikkei 225 shed 0.4%, and the Australian S&P/ASX 200 fell 0.38%. It also reflects growing apprehension regarding broader economies of the Asia-Pacific.
By mid-day on December 4, 2024, the South Korean won gained 0.8%, recovering to 1,411 against the US dollar after dipping to 1,442, its lowest level since 2022. Nonetheless, the KOSPI index remained volatile, declining by 2% at the closing bell on December 3, 2024.
Major companies like Samsung Electronics and LG Energy Solution fell 1.31% and 2.64%, respectively. Despite its short-term reactions, the government is likely to face increased market volatility amid the continual political uncertainty.
Analysts are concerned that South Korea's political crisis will have long-term implications, even though swift government and central bank interventions are in place. Portfolio manager Daniel Tan said risk premiums on South Korean equities and currency will likely increase if the political situation deteriorates.
The political situation is bleak. Opposition lawmakers have filed an impeachment motion against President Yoon. The vote is expected to take place within 72 hours. Yoon has also been urged to resign. According to rumors, he has agreed to do so collectively with the senior members of his administration.
This comes as the two sides in the National Assembly have been in a stalemate over the national budget of 677 trillion won ( approx. $471 billion). Opposition parties have called for around 4 trillion won cuts in proposed spending plans.
The revised budget cannot pass the parliamentary speaker, increasing economic uncertainty and concern over whether fiscal policy is being handled well enough.
In response to the crisis, South Korea's finance ministry announced a series of emergency measures, starting with an unlimited liquidity injection into the financial markets. The country activated a 10 trillion won ($7.07 billion) stock market stabilization fund. Financial regulators also hinted that they may enter currency markets to sell US dollars and support the won.
The BOK held an emergency board meeting and pledged to start special repo operations to provide liquidity starting December 4, 2024. It also relaxed its collateral policies to permit bank debentures issued by state-run enterprises for securing liquidity.
Analysts like Citi economist Kim Jin-wook remain cautiously optimistic. They note that the measures taken now might help stabilize markets, but the crisis will continue until political stability is regained.
