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South Korea has plunged into political crisis, following President Yoon Suk Yeol’s brief imposition of martial law on December 3, 2024. The declaration, intended to suppress opposition activities, was swiftly overturned by the National Assembly within six hours, leading to widespread protests and calls for Yoon’s resignation. An impeachment vote four days later failed due to a boycott by ruling party members.
President Yoon apologised, leaving his political and legal fate in the hands of his ruling People Power Party (PPP) while a criminal investigation is reportedly underway. Still, the crisis deepened as the Justice Ministry imposed a travel ban on Yoon.
The turmoil has adversely affected South Korea’s financial markets, with Korean stocks falling and the local currency, the Korean Won (KRW), initially weakening 3% against the dollar on the day following the declaration of martial law. Stocks stumbled further on Monday after the failed impeachment, and the KWR nearly reached a 15-year low against the USD.
As the situation remains dynamic, markets will likely face continued volatility.
Nannette Hechler-Fayd’herbe, Head of Investment Strategy at Lombard Odier, reassured that a currency crisis is unlikely due to South Korea’s strong current account surplus, reserves, and limited foreign debt. However, she expects the Won to remain weak against the USD in the coming months.
Alex Smith of abrdn highlighted potential long-term impacts: “Investors may now attach a higher political risk premium to South Korea in the long term,” said the Head of Equities Investment Specialists – Asia Pacific.
“The situation is still somewhat fluid, but the chances of major operational disruption for Korean businesses now seem unlikely. So, the immediate impact on financial markets may prove to be short-lived. However, the longer-term ramifications may persist via higher risk premia, in part because it puts Korea into the market spotlight at a time when investors are concerned that Korea may fall foul of Trump’s trade actions,” Smith added.
He also noted that multinational companies could benefit from a weaker Won, with export-oriented holdings showing resilience. Domestic businesses and those tied to Yoon’s policy agenda, including the value-up program, have been most affected.
Invesco added that proactive government and central bank responses could mitigate downside risks but noted lingering uncertainties might cap market recovery.
