[Inside Chodong] In an Unprecedented Era, Can We Save Ourselves?

Aftermath of Martial Law Fuels Uncertainty Black Hole
Prolonged Instability Casts Negative Shadow on Economy
Worst-Case Scenario Raises Fears of National Credit Downgrade

Immediately following the unprecedented ‘December 3 Emergency Martial Law’ situation, the ‘F4 Meeting’?a gathering of the heads of economic and financial authorities?was the only pillar of support amid the endlessly uncertain financial markets and economic conditions. In the early days of the crisis, the emergency decisions and messages delivered during the roughly one-hour daily meetings were hoped to calm the volatility of the exchange rate and capital markets, and to provide a quick solution to overcome the crisis.

Over the course of one and a half months after the incident, a total of 15 F4 meetings were held. After the National Assembly passed the impeachment motion against President Yoon Seok-yeol and forwarded the procedure to the Constitutional Court, the F4 meetings were held twice a week. Following the impeachment of Acting Prime Minister Han Duck-soo and the activation of the Acting Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok’s system, the meetings were reduced to once a week.

As if preparing for the prolonged abnormal situation, the frequency of meetings among the heads of economic and financial authorities decreased, and the distinctive nature of the messages they delivered also disappeared. “Each agency must maintain a high level of vigilance, monitor and respond to the financial and foreign exchange markets 24 hours a day, and make every effort to manage the economy as stably as possible.” The financial authorities, continuing the F4 meeting’s tone, addressed financial stability measures in their New Year’s work report with a brief statement that they would “continue to operate a market stabilization program worth 100 trillion won.”

Before the Macroeconomic and Financial Meeting held on the 19th at the Bankers Hall in Myeongdong, Seoul, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance (third from the left), Lee Chang-yong, Governor of the Bank of Korea (from the left), Lee Bok-hyun, Chairman of the Financial Supervisory Service, and Kim Byung-hwan, Chairman of the Financial Services Commission, briefly posed for a photo. Photo by Heo Young-han

Meanwhile, concerns from foreign media and overseas investment institutions grew louder and more frequent amid the rapidly changing political situation. Especially since the New Year, foreign media have pointed out that the unprecedented crisis was triggered by the president’s refusal to comply with arrest and confrontation with investigative agencies, warning that the erosion of trust in the rule of law and prolonged political instability could have increasingly negative effects on the economy. Global investment banks (IBs) added analyses that it has become more difficult to effectively prepare for exchange rate instability, which intensified from the fourth quarter of last year, and geopolitical uncertainties caused by the inauguration of the new U.S. administration.

Although volatility has eased somewhat, the shock of the ‘December 3 Emergency Martial Law’ remains intact. The aftermath continues, with the won-dollar exchange rate fluctuating uneasily around 1,460 to 1,470 won?over 60 won higher than before the crisis. The target of defending the 1,450 won level has vanished, and despite repeated internal and external forecasts warning that the 1,500 won level could also be at risk, authorities remain helpless. The government merely asserts that even if foreign exchange reserves of 400 billion dollars collapse, it would not be a major problem, and has asked the financial sector to seek ways to immediately reduce the repayment and settlement burdens on companies caused by the sharp rise in the exchange rate.

The stock market is no different. After suffering from sluggish economic indicators such as domestic demand contraction and declining growth rates, the already sensitive stock market structurally weakened further following the ‘black swan’ event of the national leader’s declaration of martial law, just as Donald Trump’s U.S. presidential election victory and inauguration approached. The KOSPI index has managed to recover to pre-martial law declaration levels by continuing an upward trend since the New Year, but a closer look reveals that it would have been difficult without the pension funds stepping in as a savior. Since December 3 last year, pension funds have recorded net buying in the KOSPI market on all but three trading days.

The challenges ahead are even more worrisome. The worst-case scenario for the New Year, caused by the prolonged aftermath and instability of martial law, is a decline in national creditworthiness. Recently, the world’s three major credit rating agencies met again with South Korea’s economic leaders within a month and stated, “The negative economic impact of prolonged uncertainty cannot be overlooked.” This remark, made after witnessing the National Assembly and citizens on the streets witnessing the president’s emergency martial law being lifted within two hours, and now more than a month later with uncertainty still ongoing, clearly carries a different nuance. In the midst of this unprecedented crisis witnessed by the entire world, the golden time to avoid the worst-case scenario is slipping away helplessly.