After promising to revive, South Korea’s Yoon shakes faith in the economy | Financial Markets

Kuala Lumpur, Malaysia – In one of his first appearances of the year, South Korean President Yoon Seok Yeol has pledged to boost confidence in the country’s stock market, which is notoriously undervalued compared to its peers.

As the curtain closes on 2024, Yoon has achieved the opposite, roiling markets with a temporary declaration of martial law that has plunged Asia’s fourth-largest economy into its biggest political crisis in decades.

“South Korea should be weird,” Geoffrey Cain, author of Samsung Rising and managing partner at Alembic Partners, told Al Jazeera, describing the country as an exception to the rise of authoritarianism in a region where China’s economic influence is eroding. from Hong Kong to Taiwan.

“But even its economy is not safe from political interference. Martial law has disrupted markets and this shows that South Korea is not as stable as market analysts often think. “

As the National Assembly is about to vote on Yoon’s impeachment on Saturday, the future of the president is on hold.

Yoon has dismissed calls for him to step down, and the leader of his People Power Party (PPP) on Thursday announced he would oppose the impeachment campaign, casting doubt on its chances of success.

PPP leader Han Dong-hoon told reporters that while he could not defend Yoon’s “unconstitutional” declaration of martial law, he would try to rally his party against the proposal to prevent “chaos”.

With the center-left Democratic Party (DP) and other opposition parties holding 192 seats in the 300-member National Assembly, the opposition needs at least eight conservative lawmakers to cross the threshold of two-thirds needed for impeachment. .

If the motion is successful, South Korea’s Constitutional Court will then rule on whether to confirm Yoon’s removal from office – a process that could take months.

South Korea’s benchmark stock index, the KOSPI, fell 0.9 percent in early trade Thursday, after closing 1.44 percent lower the previous day.

The South Korean won fell to a two-year low against the US dollar on Wednesday before recovering much of its losses.

“The market reaction so far has been minimal. It seems that the Korean government is putting together an emergency plan and it remains to be seen how quickly it will return things to normal,” Yeo Han-koo, a former South Korean trade minister who is now a senior fellow at the Peterson Institute for International Economics, told Al Jazeera.

“If the political unrest continues for a long time, it may affect the confidence of investors, consumers and consumers. Stabilizing the political situation will be very important. “

Although the conflict has been contained so far, a prolonged standoff could have a far-reaching effect on South Korea’s financial markets and the broader economy, analysts say.

“I think the danger could be if the president decides to step in, refuses to resign and his party doesn’t vote for impeachment,” Gareth Leather, Asia economist at Capital Economics, told Al Jazeera.

Leather said Thailand, which has been plagued by political turmoil since a coup in 2006, is an example of how ineffective leadership can cripple the economy.

“The rivalry between these two sides has not ended even though it has been 18 years,” said Leather.

“And you can clearly see from the data that it has really affected the economy, that investment has been severely depressed, that growth has been really difficult and a large part of that can be traced back to the political dysfunction that is plaguing the country.”

Although South Korea is home to world-famous corporate giants such as Samsung and Hyundai, South Korean corporate stocks have long been considered undervalued compared to their global peers.

Apple’s market capitalization is 14 times the size of Samsung Electronics, the crown jewel of the sprawling Samsung Group, despite having three times more revenue than its Korean rival.

The so-called “Korean discount” has been attributed to several factors, including the country’s proximity to North Korea and poor corporate governance in the family-run “chaebol” that dominates the economy.

After Yoon’s promise in January to make “bold” reforms to improve the stock market, his administration has released a series of measures, including an index focusing on companies that have improved financial performance and tax incentives for firms that increase shareholder returns.

Despite some positive reactions from investors, the measures did little to lift the market.

Even before Yoon’s declaration of martial law spooked investors, the KOSPI was down about 14 percent compared to July.

The weak stock market performance comes as South Korea’s economy falters, amid slowing demand in China and expectations of steeper tariffs under US President-elect Donald Trump.

Gross domestic product grew just 0.1 percent in the July-September period, central bank data showed on Thursday, following a 0.2 percent contraction in the previous quarter.

Last year’s growth rate of 1.4 percent was the weakest performance, excluding the COVID pandemic, since the aftermath of the 2008 global financial crisis.

“This incident will not cause lasting damage, but it will disturb people,” said Cain, the author, adding that South Korea’s status as an economic powerhouse “is not guaranteed forever”.

“South Korea now has to deal with the long-term problems of a shrinking workforce, export competition from Taiwan, political threats from China, and a deindustrializing economy.”

However, despite political uncertainty and economic conditions, analysts point to South Korea’s strong economic foundations and institutions as reason for optimism.

“The rapid rejection of martial law by the National Assembly and the public gives me hope – strong institutional checks, high public participation, and protection of democracy remain,” said Pushan Dutt, a professor of economics and political science at the Singapore campus. business school INSEAD, he told Al Jazeera.

“Right populists hold Viktor Orban as a model. In an era of democratic backsliding, South Korea will be an example. “

Soohyung Lee, a member of the Monetary Policy Board at the Bank of Korea and a professor at Seoul National University, said he does not believe the political crisis will have a lasting negative impact on the economy or the country’s reputation.

“Although the event was unexpected and introduced uncertainty, it also highlighted the strength of South Korean law,” Lee told Al Jazeera, stressing that his views do not reflect the official positions of the Bank of Korea or Seoul National University.

“The quick and organized response showed that the country is equipped to deal with unexpected political challenges without allowing any individual or small group to disrupt the process.”

South Korea has come out of crisis in a stronger position before, Lee said, pointing to the country’s rapid recovery from the 1997 Asian financial crisis and the 2008 global financial crisis.

“Using this history of resilience and flexibility, I remain optimistic about the future of the Korean economy,” Lee said.

Yeo, a former trade minister, said that many developed countries have recently encountered challenges with the will of the people.

“I think any country can be exposed to this type of danger. I think there is both a ‘Korea premium’ and a ‘Korea discount’,” he said.

“Korea is strong in its cultural soft power, high technology and manufacturing industry, but it is also weak in political and political wars and corporate governance, etc. It’s all about how to make money from this ‘Korea premium’, while fixing the ‘Korea discount’.”