The recent political instability in South Korea, stemming from President Yoon Suk Yeol’s brief imposition of martial law, poses a significant threat to the nation’s economic growth, according to Bank of Korea (BOK) Governor Rhee Chang-yong. In a Wednesday address, Governor Rhee suggested that the central bank may need to revise its growth forecasts downward and implement stabilizing measures in response to the ongoing crisis.
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Economic Impact of Political Uncertainty
Governor Rhee highlighted the potential for South Korea’s GDP growth to fall short of the previously projected 2.2% for this year, suggesting a more likely figure of 2.1%. He also expressed concerns about the 1.9% growth forecast for next year, emphasizing the need for increased fiscal support and other interventions to maintain economic momentum. The BOK’s next interest-rate decision is scheduled for January, and Rhee indicated that the central bank will carefully analyze economic data to determine whether a more aggressive policy response is necessary.
The BOK implemented consecutive rate cuts in October and November. While most economists anticipate a pause in rate reductions next month, a potential rate cut by the Federal Reserve this week could provide the BOK with greater flexibility to ease monetary policy if required, according to Rhee.
Stabilization Efforts and Market Volatility
Following the declaration of martial law, South Korean authorities intervened in foreign exchange markets through smoothing operations to mitigate volatility. Rhee affirmed that these interventions will continue if excessive fluctuations persist. He noted that the South Korean won has depreciated by approximately 30 won against the US dollar since the martial law decree, currently trading around 1,435 per dollar. Rhee expressed confidence that the won’s value should “normalize” in line with economic fundamentals once South Korea’s policymaking environment stabilizes.
While acknowledging lingering uncertainty, Rhee expressed some optimism following the parliament’s vote to impeach President Yoon last week, stating that the political trajectory has become somewhat clearer. The Constitutional Court will now have 180 days to determine the validity of the impeachment vote. Rhee emphasized that volatility in domestic financial and foreign exchange markets has shown signs of stabilization since the initial surge following the martial law declaration.
Inflation Outlook Remains Stable
Addressing consumer inflation, Governor Rhee anticipated that it would remain relatively stable around the BOK’s 2% target for the upcoming year. This suggests that inflation is not expected to significantly exacerbate the economic challenges posed by the political turmoil. The BOK remains committed to monitoring the situation closely and taking appropriate actions to maintain price stability and support economic growth amid the ongoing political uncertainty. The central bank’s January meeting will be crucial in determining the future direction of monetary policy and the overall economic outlook for South Korea.
The ongoing political situation continues to present challenges for the South Korean economy, and the BOK’s response in the coming months will be crucial in navigating these uncertainties. The central bank’s commitment to stability and its willingness to adjust policies as needed will play a vital role in ensuring sustained economic growth.
