On December 3rd, South Korean President Yoon Suk-yeol's abrupt declaration of a state of emergency sent shockwaves through the financial markets, causing a frenzy among foreign investors who began offloading South Korean assetsThis sudden move has heightened uncertainty in an already volatile market environment, stirring strong reactions from stakeholders and analysts alike.

Market Instability

Given that foreign investors make up approximately 30% of the participants in the South Korean stock market, the declaration of an emergency state is seen to have a significant psychological impactThe sense of crisis has spurred the net sale of approximately 260 billion Korean won (around $260 million) by foreign investors in the early trading hours following the announcement

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This trend is expected to further accelerate the decline in stock prices, while the implications of the emergency rule could pose a threat to South Korea's national credit rating.

Reports from media outlets, including CCTV Finance, have noted that the KOSPI200 index options dipped more than 5% at one point, with the iShares MSCI South Korea ETF, which tracks over 90 large and mid-sized enterprises in Korea, plunging by 7%, marking a 52-week low before slightly recovering to a 1.6% dropThe Korean won has also fallen to its lowest point against the US dollar in over two years.

On December 4th, following the market opening, the benchmark KOSPI index registered a decline of 2%, though this was eventually narrowed to 1.87%, settling at 2452 pointsThe fluctuations in the market reflected a deepening crisis confidence.

Emergency Stabilization Measures

Responding to the turmoil, the Bank of Korea convened an emergency meeting on the morning of December 4th, at 10 AM local time

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Following the discussions, officials publicly committed to boosting short-term liquidity and taking necessary steps to stabilize the foreign exchange marketThe central bank indicated its readiness to provide special loans if needed, ensuring to inject sufficient liquidity into the market until stability is achieved.

Financial Minister Kim Byung-hwan also stressed the government's dedication to utilizing all available measures to ensure normal and stable financial market operationsA fund of 100 trillion won (approximately $51.5 billion) was set to be activated for market stabilization, while measures were introduced for bond markets and advances for corporate bonds and commercial papers.

Kim added that both the government and related agencies would conduct data analysis pertinent to the financial markets and take all necessary actions, urging the public to maintain calm and approach the situation with composure

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The Bank of Korea announced that, starting from December 6th, it would ramp up short-term liquidity measures with 12 trillion won in repurchase operations, prompting a slight recovery in the won, which was then recorded at 1412.05 against the dollar.

Hana Securities remarked in a commentary that while the state of emergency had been lifted, the legal ramifications surrounding the turmoil could be severe, leading to potential outflows from stocks and mutual funds due to investor anxiety over political risks and uncertainties regarding the future of President Yoon's administration.

Despite a slight easing of market tensions, the crisis has raised concerns about the political risk premium associated with South Korean assetsVishnu Varathan, a macroeconomic research head at Mizuho Securities, stated that the fundamental factors would not fully recover and the risk premium would likely remain in place.

Although South Korea has some of the world's leading chip manufacturers and stands in a favorable position due to an upturn in the semiconductor cycle, foreign investors’ appetite for South Korean assets seems to be waning as a result of multiple uncertainties.

Impeachment of the President

Reported by CCTV News on December 4th, the largest opposition party in South Korea, the Democratic Party of Korea, is pushing forward an impeachment motion against President Yoon Suk-yeol

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The Democratic Party has declared intentions to accuse President Yoon, Defense Minister Lee Jong-seop, and Minister of Public Administration and Security Lee Sang-min of sedition and to advance the impeachment process.

At a press conference on December 4th, spokesperson Jo Seung-rae articulated these intentions, emphasizing that the opposition will also accuse key participants such as the commander in charge during the emergency and high-ranking police officials, deeming the event a widely recognized insurrection that requires immediate investigation and legal action.

Later that afternoon, the opposition party officially filed the impeachment motion against President YoonAs of the time of reporting, the political crisis remains unresolved.

Economist Rory Green from TS Lombard predicts that President Yoon is "destined to face impeachment." Should the opposition succeed, TS Lombard may increase its GDP growth forecasts for the country, while such a development could also yield a more moderate interest rate reduction cycle from the Bank of Korea.

Previously, the Bank of Korea has continually reduced key interest rates and indicated that the economic growth rate is expected to fall below initial forecasts