If Impeachment Prolongs, 'National Credit Rating' May Be Downgraded... "Urgent Need to Resolve Uncertainty"

Economic Analysis After Martial Law by Korea Institute for Industrial Economics & Trade, KDI, and Korea Institute for International Economic Policy
Rep. Kim Hyunjung Discloses Analysis from Government-Funded Research Institutes
KDI: "Significant Uncertainty, Difficult to Assess Economic Impact"
Korea Institute for International Economic Policy Proposes "Extension and Expansion of Government-National Pension Foreign Exchange Swap Terms and Limits"

An analysis has emerged suggesting that South Korea's national credit rating could decline due to the prolonged impeachment crisis following President Yoon Suk-yeol's 'December 3 Martial Law Incident.' It is pointed out that resolving the uncertainty and anxiety surrounding the impeachment and enhancing domestic and international trust are the most urgent tasks for economic stability.

On the 12th, citizens at the Seoul Station waiting room are watching the urgent statement announcement regarding President Yoon Seok-yeol's declaration of martial law. Photo by Kang Jin-hyung

On the 14th, Kim Hyun-jung, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, received an analysis titled ‘South Korea's Economic Situation, Outlook, and Countermeasures after the Emergency Martial Law’ from government-affiliated research institutes including the Korea Development Institute (KDI), the Korea Institute for Industrial Economics and Trade (KIET), and the Korea Institute for International Economic Policy (KIEP). According to the analysis, KIET, one of the government's economic policy think tanks, expressed the opinion that “if the impeachment drags on, there is a possibility of a downgrade in the national credit rating.”

Meanwhile, KDI diagnosed that significant uncertainty exists, making it difficult to gauge the economic impact. KIEP proposed the need to extend the duration and limit of the foreign exchange swap agreement between the government and the National Pension Service to alleviate exchange rate instability.

KIET analyzed, “The domestic financial market continues to show instability, with sharp declines in stock prices and rising exchange rates due to the declaration and lifting of martial law and the uncertainty surrounding the impeachment.” It added, “The Korean CDS (Credit Default Swap) premium, which reflects external creditworthiness, has slightly increased due to the martial law impact but still shows a generally moderate trend.”

It further stated, “Although international credit rating agencies have not changed South Korea's national credit rating, if the impeachment issue continues for a long time and political uncertainty persists, there is a constant possibility of a downgrade due to concerns about the negative economic impact.” Currently, South Korea's national credit rating is maintained at AA by Standard & Poor's (S&P) and Aa2 by Moody's.

KDI explained, “Since the declaration of martial law, volatility in some financial market indicators such as exchange rates and stocks has increased, but the financial market is considered to be within a manageable range.” However, it added, “Since there is still considerable uncertainty about the political developments after the declaration of martial law, it is difficult to estimate the economic impact at this time.”

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KIEP analyzed that the domestic financial market showed synchronization with the international financial market before and after the U.S. presidential election but has shown a differentiated pattern since the martial law announcement on December 3. KIEP explained, “After the martial law announcement, while the U.S. dollar remained stable globally, the won-dollar exchange rate rose to the 1,440 won level amid domestic political turmoil and heightened uncertainty. The foreign exchange bond CDS premium, one of the representative indicators of South Korea's national credit risk, increased due to rising U.S. Treasury yields and a slowdown in South Korea's economic growth, and surged significantly after the martial law announcement due to domestic political turmoil and foreign investors' concerns about the domestic economy.”

Additionally, KDI advised that while managing the economic system to maintain normal operations, it is necessary to present the current economic situation accurately and transparently to prevent economic agents from becoming excessively anxious.

KIEP emphasized the need for multifaceted efforts to stabilize the foreign exchange market anxiety and concerns about the domestic economy caused by excessive anxiety among domestic and foreign investors, proposing exchange rate stabilization measures. In particular, it suggested that, on a macro level, responses through financial policies such as regulating foreign exchange derivative position ratios, implementing foreign exchange soundness charges, and foreign currency liquidity regulations should be prioritized over monetary policies like interest rate hikes.

On a micro level, it called for reducing dollar demand and increasing supply in the foreign exchange market by expanding the scale of foreign exchange swaps with the National Pension Service and encouraging flexible foreign exchange hedging ratios for pension funds. It proposed further extending the maturity and increasing the limit of the foreign exchange swap (FX Swap) agreement between the foreign exchange authorities and the National Pension Service, which was extended from the end of this year to a later date and increased from $35 billion to $50 billion in June.

It explained that the National Pension Service holds approximately $480 billion in overseas assets, and if the foreign exchange hedging ratio is increased from the current level (2.75% as of the end of September) to the strategic upper limit of 10%, about $35 billion more dollars could be supplied. It also suggested promoting the repatriation of overseas investment funds by domestic investors and further expanding incentives for domestic securities investment by Koreans as alternative measures.

Specific measures to strengthen incentives for domestic securities investment include temporarily raising the overseas securities investment income deduction limit, currently capped at 2.5 million won, temporarily reducing capital gains tax on repatriated funds after overseas asset sales, expanding tax benefits for domestic securities investments within Individual Savings Accounts (ISA), and strengthening the value-up system.

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