[New York Diary]The Arriving 'Martial Law Invoice' Is Just the Beginning

Bills are beginning to arrive one by one in relation to President Yoon Suk-yeol's declaration of martial law, which has shaken the very foundations of democracy. The United States, South Korea's largest ally, is openly discussing the crisis in Korean democracy, and the financial and foreign exchange markets have not been able to avoid the shock. In addition, with the prolonged political uncertainty caused by the failed vote on President Yoon's impeachment bill pushed by the opposition, various economic losses are expected to increase even more rapidly. How much will we have to pay for this martial law crisis?

First, the costs related to the exchange rate are significant. Immediately after the declaration of martial law, the won-dollar exchange rate soared to the 1,446 won range at one point. Considering that the exchange rate had remained in the high 1,300 won range until November, this means it jumped by about 3% in an instant due to the declaration of martial law. Although it has now come down to the 1,420 won range, it is still higher than before the crisis, and financial experts are leaving open the possibility that it could surpass the 1,450 won mark. According to a report by the National Assembly Budget Office, if the real effective exchange rate rises by 1%, real gross domestic product (GDP) decreases by 0.1% due to higher import prices, which lead to reduced facility investment and private consumption. Given that South Korea's real GDP last year was 1,996 trillion won, if the sharply increased won-dollar exchange rate (1,446 won) is maintained for a significant period, the annual GDP loss could approach 6 trillion won.

The martial law crisis also dealt a blow to the capital markets. Foreign investors made net sales of 1.0334 trillion won in the KOSPI market over the three days starting from December 4, the day after the declaration. The total market capitalization of the KOSPI evaporated by about 58 trillion won in just three days. The KOSDAQ also hit its lowest point of the year, with trillions of won in funds flowing out of the so-called "national market." The outlook is even more concerning going forward. If political instability surrounding martial law and impeachment continues, the country's credit rating could be downgraded, and companies may face greater risks in raising capital.

Self-employed business owners who had hoped for a year-end boost are also disheartened. This is because there are increasing cases of year-end gatherings being canceled or consumer spending being reduced due to the unstable political situation. In the fourth quarter of 2016, when suspicions about former President Park Geun-hye's secret confidante and the impeachment crisis unfolded, the private consumption growth rate was only 0.2%, half that of the previous quarter. As some countries, including the United Kingdom, have designated South Korea as a "travel risk country," the tourism and cultural sectors are also expected to inevitably suffer losses.

The most concerning aspect is the irreparable and enormous losses the martial law crisis has caused in the fields of diplomacy and security. The Joe Biden administration has positioned South Korea as a key ally in the Indo-Pacific region through a "democracy vs. dictatorship/authoritarianism" framework in its foreign policy. For the United States, which has built military bases and strengthened alliances with South Korea as a defensive barrier against North Korea, China, and Russia, President Yoon's declaration of martial law was a complete "stab in the back." The U.S. government has not hidden its displeasure and bewilderment over President Yoon's actions. The U.S. Deputy Secretary of State, a vice minister-level official, even publicly described President Yoon's decision as a "grave misjudgment." The United States is also postponing and suspending security consultations that could have emphasized the ironclad U.S.-South Korea alliance.

Already, U.S. media outlets are pointing out that "the U.S.-South Korea alliance is facing its greatest test in decades due to the declaration of martial law in South Korea, which Biden had called a model democracy" (The New York Times), and "Can Washington continue to rely on Seoul as a steadfast and trustworthy ally?" (Bloomberg News). As a result of this martial law crisis, South Korea's role within the U.S.-led democratic bloc is being called into question. Calls to elevate South Korea's status by joining the Group of Seven (G7) Plus are also expected to fade away due to this incident. The losses resulting from the decline in South Korea's national prestige and standing in the international community are incalculably enormous. To make matters worse, there is the possibility that Donald Trump, the U.S. President-elect known as the "master of negotiation," may use the martial law crisis as leverage to demand astronomical increases in defense cost sharing.

The losses in the economy, diplomacy, and security resulting from this martial law crisis are almost impossible to calculate. Furthermore, with the political standoff between the ruling and opposition parties expected to prolong the impeachment crisis for some time, the political uncertainty and the costs of the bills that will continue to arrive due to martial law are likely to snowball. Already, with growing concerns over crises at Samsung Electronics and Lotte Group, and the increased internal and external uncertainties triggered by the potential advent of Trump 2.0, the South Korean economy is struggling day by day. Now, on top of the rapidly changing international situation and macroeconomic environment, the country must overcome the enormous and unexpected obstacle of the president's declaration of martial law. All that remains is a deep sigh.