South Korean Economy Under Martial Law, Standing Amid Crisis and Uncertainty [AK Radio]

The declaration of martial law has plunged the South Korean economy into unprecedented turmoil. Last night (the 3rd), President Yoon Suk-yeol declared martial law, causing offshore financial markets to fluctuate sharply. The exchange rate surged and stock prices fell, creating a chaotic situation. In response, the government and the Bank of Korea acted swiftly. Following the declaration of martial law, the so-called F4 meeting was urgently convened to discuss measures to stabilize the financial markets. The first meeting was held at 11:40 p.m., about an hour after the declaration, and was held again at 7 a.m. the next day. Attendees included Deputy Prime Minister for Economic Affairs Choi Sang-mok, Bank of Korea Governor Lee Chang-yong, Financial Services Commission Chairman Kim Byung-hwan, and Financial Supervisory Service Governor Lee Bok-hyun. To ease financial market instability, the government decided to supply unlimited liquidity if necessary and immediately activate a 10 trillion won stock market stabilization fund, a 40 trillion won bond market stabilization fund, and a corporate bond and CP purchase program. Additionally, to secure foreign currency liquidity, foreign currency RP purchases and exchange rate stabilization measures were strengthened. The Bank of Korea expanded short-term liquidity supply through extraordinary RP purchases, broadened the scope of securities and institutions involved in open market operations, and took comprehensive measures.

A difficult life and exhausting days mark the end of the year. With high inflation, household debt, and the lowest economic growth rate on record, the worries of ordinary people have deepened. Jeonse fraud, kidnapping, murder, and violent attacks with weapons have made life unstable. As the Year of the Black Rabbit comes to a close, we hope that the shadow of the harsh recession will lessen in the new year of 2024. Photo by Hyunmin Kim kimhyun81@

Economic experts are concerned about the medium- to long-term impact of martial law on the South Korean economy. Professor Kang Sung-jin of Korea University’s Department of Economics warned, "This is a situation rarely seen in a democracy with a per capita income of $35,000," adding, "If political instability continues, political uncertainty could further worsen the economy." Professor Lee Yoon-soo of Sogang University also pointed out, "Given South Korea’s industrial structure, political instability directly affects economic activities," emphasizing, "It is highly likely to negatively impact exports and domestic demand." Additionally, concerns were raised that major government-led economic policy initiatives risk losing momentum.

Amid increasingly bleak growth forecasts for the South Korean economy, the unexpected variable of martial law has been added. Previously, the Bank of Korea revised this year’s growth forecast down from 2.4% to 2.2%, and next year’s forecast from 2.1% to 1.9%. National research institute KDI and the IMF also lowered this year’s forecast from 2.4% to 2.2%, predicting next year’s growth at 2.0%. Overseas investment banks offered even more pessimistic outlooks. Goldman Sachs downgraded next year’s growth forecast to 1.8%, and JP Morgan to 1.7%, expressing concerns over downside risks to the South Korean economy. The main causes of the growth slowdown are summarized as weak domestic demand and export deceleration. Although exports showed an increasing trend since the end of last year, the slowdown has become more pronounced recently. November exports increased by 1.4% year-on-year, maintaining a 14-month consecutive growth streak, but the growth rate slowed from 11% in August to 4.6% in October and 1.4% in November.

Meanwhile, examining industrial activity trends reveals that all three major economic indicators?production, consumption, and investment?recorded declines, exposing the overall vulnerability of the economy. The total industrial production index fell by 0.3% compared to the previous month, and retail sales decreased by 0.4%, marking two consecutive months of decline. Particularly, facility investment dropped by 5.8%, recording the largest decrease this year. These indicators demonstrate difficulties across the entire spectrum of economic activity. With exports slowing, the possibility of high tariffs imposed by the Trump administration’s second term, sluggish recovery of the Chinese economy, and concerns over an EU recession are expected to pose significant obstacles to export recovery. While a re-escalation of the US-China trade war could potentially bring some benefits, the uncertainty remains high.

Martial law may also negatively affect the country’s credit rating. Fortunately, S&P has stated so far that "martial law has no material impact on South Korea’s credit rating," but if the situation prolongs or political instability intensifies, it could lead to a downgrade. This would directly result in a decline in government bond prices and a contraction of investor sentiment. The South Korean economy currently faces a crisis both internally and externally. Martial law, political instability, and global economic headwinds are converging to maximize uncertainty. While the government and the Bank of Korea’s prompt response has contributed to short-term market stabilization, political stability and public-private cooperation are essential to resolve medium- to long-term economic uncertainties. It is time for the public, businesses, and government to collaborate and seek ways to overcome the crisis.