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In a surprising turn, South Korean President Yoon Suk Yeol lifted the declaration of martial law imposed overnight, causing the won to initially plummet to record lows.
Faced with this crisis, the Ministry of Finance announced that it will deploy “unlimited liquidity” to stabilize financial markets. This decision was made after emergency meetings between Finance Minister Choi Sang-mok and Bank of Korea Governor Rhee Chang-yong, along with the approval of rescue measures by the central bank board.
The won stabilizes around 1,414, after having touched 1,442 yesterday. Source: Google Finance
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The Bank of Korea will initiate special repurchase operations (repo) to support financial institutions and ensure normal market operation.
In addition, it will make repo collateral policies more flexible, allowing the inclusion of bonds issued by some state companies. On the other hand, the financial regulator is prepared to activate a stock market stabilization fund worth 10 trillion won ($7.07 billion).
The local currency, the won, managed to recover 0.8% at 02:12 GMT, after hitting a two-year low of 1,442 units per dollar. This rise was attributed to possible interventions by the authorities, who would have sold dollars to stop the fall of the won.
Impact on financial markets
Although markets achieved some stability during the day, fears persist among investors about long-term political stability. Korean stocks closed with a drop of 2%, highlighting losses in Samsung Electronics (-1.31%) and LG Energy Solution (-2.64%). On Wall Street, Korea-related ETFs, such as the iShares MSCI South Korea ETF (EWY.P), fell about 1%.
The situation highlights the “Korean Discount” phenomenon, a tendency for local companies to have lower valuations than their global peers.
According to Daniel Tan, manager at Grasshopper Asset Management, the KOSPI stock index trades at 0.8 times the estimated one-year book value, while the MSCI World index trades at around 3 times. This could lead investors to demand a higher risk premium for investing in South Korea.
Fiscal and political risks
The political landscape adds uncertainty. The standoff between Yoon and the opposition-controlled parliament has led to a stalemate in approving the budget.
The initial proposal of 677.4 trillion won ($470.7 billion) was cut by 4.1 trillion by the Democratic Party, blocking the voting process. A reduced budget could limit fiscal spending at a critical time for the economy, which is facing a slowdown in exports.
Economic outlook
Despite the political chaos, analysts suggest the impact on markets could be short-lived. According to Kim Jin-wook, an economist at Citi, the rapid policy response could effectively mitigate economic and political uncertainties.
South Korea faces a critical challenge to restore confidence in its markets and demonstrate stability amid turbulence. International investors, meanwhile, are cautiously observing how the country manages this complex situation.
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