South Korea has found itself in the global spotlight after a stunning series of political events this week, raising concerns about the future of Asia’s fourth-largest economy. President Yoon Suk Yeol’s sudden announcement of emergency martial law on Tuesday evening, followed by a swift reversal a few hours later, has injected new uncertainty into the country’s economic and political landscape. Analysts warn that the fallout could worsen South Korea’s already difficult economic outlook, but some believe the turmoil could pave the way for brighter prospects if deeper instability can be avoided.
President Yoon initially justified the declaration of martial law as a necessary step to protect South Korea from “communist forces” present in North Korea and to deal with so-called “anti-state forces.” However, his decision to revoke the order came after nearly 200 lawmakers gathered in the National Assembly to unanimously block the move. The rapid backtracking triggered political upheaval in the country, a key player in global supply chains and a close U.S. ally.
The immediate impact of the political drama was felt on financial markets. U.S.-listed Korean stocks fell after Yoon’s announcement, while South Korea’s won fell to a two-year low against the U.S. dollar. Although the currency recovered most of its losses on Wednesday, the market as a whole remains volatile.
Economic concerns in a context of political uncertainty
South Korea’s Kospi index closed 1.44% lower on Wednesday, paring earlier losses by more than 2% after opposition lawmakers started impeachment proceedings against Yoon. The index’s decline reflects growing concerns about the impact of political uncertainty on an economy already grappling with external and domestic pressures.
Kim Byung-hwan, South Korea’s vice minister of economy and finance, sought to reassure markets late Wednesday, announcing that the government was ready to deploy 10 trillion won (about $7.06 billion) to stabilize the stock market “anytime”.
Despite government intervention, uncertainty surrounding Yoon’s presidency continues to weigh on investor sentiment. Deutsche Bank strategists noted in a research report that while the immediate crisis has calmed, South Korea’s central role in global supply chains makes its political and economic developments crucial to monitor.
Structural challenges for Korean markets
Jonathan Garner, chief equity strategist for Asia and emerging markets at Morgan Stanley, highlighted the broader structural issues facing South Korea’s economy. Speaking to CNBC Road signs in AsiaGarner explained that Morgan Stanley remains underweight Korean stocks, given the country’s vulnerability to global economic distress.
“Korea is one of the most trade-dependent markets we cover and faces significant risks from tariff and non-tariff barriers globally,” Garner said. “In addition, the semiconductor cycle is starting to weaken and the global automotive sector is under pressure, both of which are weighing heavily on the Korean market.”
Garner also pointed out that even before the recent political turmoil, economists at Morgan Stanley had predicted that South Korea’s economic growth would fall below 2% in 2025, marking one of the steepest slowdowns globally.
Major South Korean companies have already felt the ripple effects. Technology giant Samsung, the country’s largest company, saw its shares fall 1% on Wednesday. Battery maker LG Energy Solution and automaker Hyundai Motor posted losses of 2.8% and 2.4% respectively, reflecting broader concerns about the country’s trade-dependent industries.
Currency volatility increases investor concerns
The South Korean won, one of the most closely watched Asian currencies, also saw increased volatility. It last traded at 1,414.22 against the US dollar, recovering from Tuesday’s low of 1,444.93, the weakest level since October 2022, according to LSEG data.
Rory Green, chief China economist and head of Asia research at TS Lombard, noted that uncertainty surrounding Yoon’s presidency will likely keep pressure on Korean assets, particularly Asian currencies. “Negative price action and volatility are likely to continue,” Green wrote in a research note.
Criticism of Yoon’s leadership
Economists have criticized Yoon’s attempt to impose martial law, describing it as a badly timed and politically damaging move. Trinh Nguyen, senior economist at Natixis, called it a “very, very bad decision” and a significant misstep for South Korea in a critical period.
“Martial law has not been declared since 1979, and for good reason: It is profoundly bad for the country’s image,” Nguyen told CNBC. Squawk Box Asia. “While the turnaround is positive, the entire episode has introduced significant political uncertainty, particularly regarding President Yoon’s future.”
Nguyen pointed out that South Korea’s economy is already under pressure, with exports falling in October, a weakening chip cycle and subdued domestic demand. “This is not a good time for South Korea. We need strong governance and a fiscal strategy that addresses both short- and long-term challenges, including pressure from China and tariffs,” he added.
Recovery potential
Despite the current turmoil, some analysts see reasons for cautious optimism. Thomas Mathews, head of markets for Asia Pacific at Capital Economics, noted that Yoon’s impeachment or resignation could ultimately stabilize the political environment and improve investor sentiment.
“Presidential impeachments are not unprecedented in South Korea. The country’s markets, at least, performed relatively well during the last impeachment in 2016-2017,” Mathews wrote in a research note. He added that the political system’s ability to check executive power could reassure investors.
Mathews also highlighted the resilience of South Korea’s technology sector, which is well positioned to benefit from growing global demand for artificial intelligence (AI) and other emerging technologies. “If investor sentiment towards South Korea were to improve, we believe it could do so sharply, given the strength of major Korean technology companies,” he said.
Navigating an uncertain future
For now, uncertainty remains the dominant theme in South Korea’s political and economic outlook. The impeachment proceedings against Yoon are likely to dominate headlines in the coming weeks, and their outcome will play a crucial role in shaping the trajectory of the country.
At the same time, South Korea is facing broader economic challenges, including declining global demand for semiconductors, stagnating domestic consumption and rising geopolitical tensions. The country’s ability to overcome these obstacles will depend on effective leadership and coordinated fiscal and monetary policies.
While the political drama has shaken investor confidence, analysts suggest South Korea’s long-term prospects remain intact. The country’s robust technology sector, strategic position in global supply chains and institutional strength could help it weather the storm if political stability is restored. However, as Mathews noted, “there is probably still a lot of water to go under the bridge before we see a significant recovery in sentiment.”
For now, South Korea’s markets and economy remain in a delicate balance, with investors watching every development closely.
