South Korea's financial markets reel amid political turmoil
The South Korean constitutional crisis is causing significant turbulence in the region's financial markets, leading to substantial fluctuations in stock exchanges and the foreign exchange market. The Korean won has experienced one of the greatest depreciations against the dollar in several years, though it has partially recovered some losses. What's next?
The South Korean stock index Kospi fell by 1.44% on Wednesday to a level of 2,464 points, and the technology company index Kosdaq decreased by as much as 1.98% to 677 points. This is a direct market reaction to the unprecedented political crisis linked to the declaration, and then the withdrawal, of martial law by President Yoon Suk Yeola.
Destabilization of the foreign exchange market
The South Korean won has been under strong selling pressure. As Alvin Tan, head of Asia currency strategy at RBC Capital Markets, points out, the won's exchange rate could weaken to as low as 1,450 per dollar in the coming months, despite interventions by the Bank of Korea. Currently, the Korean currency is traded at 1,417 per dollar, indicating significant depreciation since the onset of the crisis.
The Bank of Korea responded promptly to market disruptions by organizing an extraordinary board meeting. The monetary authorities announced an increase in short-term liquidity and the implementation of measures to stabilize the foreign exchange market. Simultaneously, the South Korean financial regulator declared its readiness to launch a stabilization fund worth 10 trillion won (approximately CAD 9.96 billion).
Impact on regional stock markets
Political uncertainty in South Korea is also affecting other Asian markets. Japan's Nikkei 225 ended the session almost unchanged at 39,276 points, while the Chinese CSI 300 index lost 0.54%, closing at 3,931 points. Hong Kong's Hang Seng was down 0.1% to 19,730 points in the last hour of trading.
Particularly affected were the shares of South Korean blue chips. Samsung Electronics lost nearly 1%, battery manufacturer LG Energy Solution and automotive giant Hyundai Motor posted declines of 2.8% and 2.4% respectively. The largest drop was recorded by Korea Gas Corporation, whose shares fell by over 14%.
Global investors responded by selling off South Korean assets. The iShares MSCI South Korea ETF, a fund tracking the performance of over 90 large and medium-sized companies from South Korea, experienced a decline of 7% at the peak of the sell-off, reaching a 52-week low. Later, the losses were partially recouped, and the session ended with a 1.6% decline.
David Riedel, founder and president of Riedel Research, commented to CNBC that the current political crisis could undermine investors' confidence in the South Korean market in the long run. However, he pointed out sectors that might be relatively resilient to political turmoil, including nuclear energy, cosmetics, and the defence industry.
Trinh Nguyen, a senior economist at Natixis, notes that the political crisis is hitting South Korea's economy at an especially difficult time. The country is already struggling with weak domestic demand, shrinking exports, and a downward cycle in the semiconductor market. In this situation, a strong government capable of implementing a long-term fiscal support program would be particularly needed.
