The short-lived imposition of martial law in South Korea this week sent ripples through financial markets. However, the swift response by government officials to reinstate democratic processes and reassure investors has seemingly contained the damage, at least for the time being. This decisive action has reinforced confidence in South Korea’s institutions and mitigated potential long-term economic consequences.
South Korea’s five-year credit default swaps (CDS), a key indicator of investor sentiment and perceived sovereign risk, decreased on Thursday, remaining significantly below their peak levels for the year. Similarly, the sell-off pressure on the benchmark Kospi index has subsided, and the Korean won has largely recovered from its initial losses following President Yoon Suk Yeol’s abrupt declaration – and subsequent swift reversal – of martial law.
Example: Chart illustrating the performance of the South Korean Won and Kospi Index during the period.
The brief six-hour duration of martial law, combined with the Bank of Korea’s (BOK) proactive measures to stabilize markets, played a crucial role in calming investor nerves. The central bank downplayed the economic fallout from the political crisis, pledging to inject “unlimited liquidity” if required. Furthermore, the BOK extended its repo operations to enhance market liquidity.
“The rapid and effective response from financial regulators has underscored the robustness of South Korea’s institutions,” commented Sheldon Chan, portfolio manager for Asia credit at T. Rowe Price Group Inc. He characterized the swift resolution as a “silver lining,” demonstrating South Korea’s political maturity in countering anti-democratic actions without succumbing to widespread instability.
Example: Image of the Bank of Korea building in Seoul.
S&P Global Ratings affirmed on Thursday that the country’s AA sovereign rating is unlikely to be affected by the recent political turbulence over the next one to two years. The ratings agency cited the rapid return to normalcy as a strong indicator that the credit impact will likely be minimal. “The restoration of relative stability without significant violence demonstrates the effectiveness of checks and balances within the South Korean political system,” S&P analysts noted in their report. “We anticipate this will likely mitigate any detrimental effects on investor confidence.”
This assessment aligns with the perspective of Bank of Korea Governor Rhee Chang-yong, who commended the “mature” response of South Korean citizens and highlighted the continued normal operation of the stock market as evidence of economic resilience.
Example: Image of trading activity at the South Korean Stock Exchange.
Despite the positive short-term outlook, challenges remain for South Korea. The political uncertainty adds to existing concerns surrounding slowing economic growth and potential vulnerabilities to trade tensions should Donald Trump return to the White House.
“The direct credit impact of the brief martial law period is minimal,” stated Anushka Shah, a senior credit officer at Moody’s Ratings. “The primary risk stems from the potential for prolonged volatility and uncertainty, which could negatively impact other facets of the economy.”
As of Thursday, the Kospi index was down approximately 0.5%, following a 1.4% decline in the previous session, while the won experienced a marginal depreciation of around 0.17%. The market’s ongoing response to the political events will be closely monitored by investors and analysts alike.
In conclusion, while South Korea’s brief foray into martial law triggered initial market jitters, the government’s rapid and decisive actions to restore democratic norms, coupled with the central bank’s proactive liquidity measures, have effectively contained the potential economic fallout. The episode underscores the resilience of South Korea’s institutions and its capacity to navigate political uncertainty. However, the country still faces challenges related to slowing growth and potential trade disruptions, which will require ongoing attention from policymakers and investors.
