[ANALYSIS] South Korea’s political instability rocks sentiment in the region

OVERVIEW:

• South Korean President Yoon on Tuesday surprisingly declared martial law citing "anti-state forces" and the threat from North Korea as justification. This was then backtracked hours later after the South Korean National Assembly unanimously voted to block the move.


• South Korean ruling party leaders urged President Yoon to resign from the party and the ruling party leader saw the need to oust the defence chief and suggested that Yoon be kicked out of the party although ruling party lawmakers had various views and were undecided on Yoon's departure from the party.


• Furthermore, the main opposition party announced it would seek to impeach President Yoon on grounds of treason, and it was also reported that South Korea's Cabinet offered mass resignations.


• Martial law allows military authorities temporary rule at a time when civil authorities are deemed unable to function. Yesterday saw martial law imposed (albeit short-lived) for the first time since 1979 – when the then long-term military dictator was assassinated during a coup.


• Observers believe the martial law declaration by Yoon was spurred more by domestic political woes (after growing unpopularity since losing parliamentary elections in April alongside a series of scandals) and less by external threats.


• The Korean Confederation of Trade Union, South Korea’s largest union, said thousands of its members will strike and continue to hold rallies until President Yoon steps down. South Korea's metal workers' union said it will launch a full strike from December 11th unless President Yoon steps down, according to Yonhap.

MARKET REACTION:

• KOSPI opened lower by some 2% but gradually recovered throughout the APAC session to end the session -1.3%.


• Overnight, the KRW gradually recovered after sizeable weakness was seen upon the initial announcement (USD/KRW rose to 1,443.40 on Tuesday) and before the backtrack. USD/KRW ~1,412.10 @ 07:30 GMT on Wednesday vs ~1,403.96 on Monday’s close.


• BoK said it will increase short-term liquidity measures starting Wednesday and will loosen collateral policies in the repo operation to ease any bond market jitters, while it will deploy various measures to stabilise FX as needed and will make any special loans available to inject funds into the market if required.


• South Korea's regulator said it is ready to deploy the KRW 10tln stock market stabilisation fund anytime, according to Yonhap.


• BoK Governor Rhee on Bloomberg TV suggested more rate cuts are unlikely despite the turmoil and added that "political certainty may have increased", whilst the BOK is not changing its economic outlook.

GEOPOLITICAL REACTION:

• 
  US: Expressed “grave concern” and underscored the “ironclad” partnership between the US and South Korea. The US said it was completely unaware of the announcement but there has been no change in the US military's force readiness in South Korea.


• 
  Japan: Japan said it is closely monitoring the evolving situation in South Korea to determine its implications on bilateral ties.


• 
  North Korea: No public reaction yet.

DESKS’ THOUGHTS:

• 
  Moody’s: "A prolonged period of political conflict that impacts economic activity and leads to work stoppages... would be credit negative”.


• 
  ING: Does not, at this stage, expect any changes to South Korea’s credit ratings as they do not see the situation escalating further, but caveat that “the situation is quite fluid, and it is possible that the rating outlook could change”, whilst the impact on the economy will depend on how the situation evolves from here.

WHAT’S NEXT?:

• South Korea's opposition lawmakers have begun impeachment proceedings against President Yoon.


• Two-thirds of South Korea’s 300-member National Assembly is needed to pass the impeachment bill. The vote must take place within 72 hours of the impeachment bill being proposed.


• If impeachment is approved, President Yoon will be suspended immediately and PM Han Duck-soo will become acting president.


• A nine-member council will vote at a trial held before the Constitutional Court. Six members’ votes are needed to sustain the impeachment, upon which the President will be removed from office.


• Yoon’s term runs through 2027, but his departure will trigger an election for a successor.

TOP CONTENDERS TO REPLACE YOON:

• 
  Lee Jae-myung: Leader of the main opposition Democratic Party. Advocates for progressive policies such as increased taxes on wealthy conglomerates, as well as a universal basic income and cash handouts to revive the economy. Lee is known for a more conciliatory approach to North Korea, which could align with US President-elect Trump’s sentiment. That being said, the Seoul Central District Court handed Lee a year-long jail term (suspended for two years) for making false claims in 2021. Lee is appealing the ruling but if the ruling is confirmed, Lee will be stripped of his parliamentary seat and will not be able to run in the next presidential election.


• 
  Han Dong-hoon: The “continuity” candidate and leader of Yoon’s ruling People Power Party, with opinion polls showing Han as one of the popular choices to replace Yoon in the 2027 elections. Han favours business-friendly policies, a tough approach to North Korea, and strong alliances with the US and Japan.


• 
  Cho Kuk: Leader of the Rebuilding Korea Party, former senior presidential secretary under President Moon Jae-in and a political rival of Yoon. Cho favours dialogue with North Korea and is sceptical of coordinated pressure on Pyongyang from regional allies. A pending Supreme Court decision could bar him from political office until after the next election if his conviction is upheld.

04 Dec 2024 - 08:52- ForexGeopolitical- Source: Newsquawk