Two contrasting tales about impeachment's economic impact

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Two contrasting tales about impeachment's economic impact

Published: 05 Dec. 2024, 18:41 Updated: 05 Dec. 2024, 18:57

SHIN HA-NEE
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Audio report: written by reporters, read by AI

President Yoon Suk Yeol in an unannounced televised public address late Tuesday declares emergency martial law at the Yongsan presidential office in central Seoul on Tuesday. [PRESIDENTIAL OFFICE]

As President Yoon Suk Yeol became Korea's third president to face impeachment following the ill-executed declaration of emergency martial law on Tuesday, investors are on edge over its potential implications for Korea's already struggling financial market.

In the past two impeachment trials, the stock market reacted differently in the face of major political turmoil — rising about 4.5 percent back during the 2016-2017 incident, and sliding nearly 15 percent in 2004.

But if history is anything to go by, the ongoing political tussle is unlikely to have a lasting impact on Korea’s economic trajectory, experts suggest. The key variable moving forward, therefore, will likely be the extent of the inevitable uncertainty, rather than who is at the helm or not.

The liberal Democratic Party put forward an impeachment motion against the president on Wednesday afternoon, which will now proceed to a vote in the National Assembly on Saturday. If the motion is passed, Yoon will be the third president in the country's history to go under an impeachment trial by the Supreme Court.

While the market response was relatively subdued, foreigners have been on a selling spree for two consecutive sessions, offloading shares worth 723.7 billion won ($511.1 million) from Wednesday to Thursday, and the won-dollar exchange rate still remains at a two-year high.

The ongoing political unrest exerts downward pressure by dampening investor and consumer confidence. In the longer run, however, the prospect of the Korean financial market is likely to be determined by the fundamentals and external macroeconomic variables, rather than the current short-term surge in volatility, as was the case during the previous two impeachment trials.

The most recent impeachment motion before the latest one was against former President Park Geun-hye in 2016. The Kospi rose 4.48 percent to 2,097.35 from Nov. 1, 2016, when calls for her ousting were growing, through March 10, 2017, when the Supreme Court upheld the impeachment, formally removing her from office.

On the other hand, the Kospi fell 14.5 percent from March 2, 2004, a week before the National Assembly put forward an impeachment motion against late President Roh Moo-hyun, through May 14, when Roh returned to office after the Supreme Court rejected the motion.

In the case of Park, the biggest factor that drove up the benchmark index was an economic upcycle that began in early 2017, with the trade environment turning favorable. In contrast, China’s monetary tightening announced in April 2004 pushed the Kospi sharply down.

Bank of Korea Gov. Rhee Chang-yong also offered assurances that the ongoing chaos is unlikely to result in a meaningful change in the long-term trajectory, saying, “Looking back on the previous two impeachment cases, their impact on economic growth or mid- to long-term economic prospects were limited,” during a press conference at the central bank on Thursday.

“The impeachment issue appears to be more relevant to short-term investor sentiment than economic fundamentals, considering the fact that the stock market reflected the domestic and global macroeconomic trend rather than the political risks during the previous two impeachment trials,” said Byeon Jun-ho, an analyst at IBK Securities, in a note issued on Thursday.

However, Byeon also noted that the market may react more sensitively this time compared to 2016, considering that the Korean economy now faces a slowdown.

BY SHIN HA-NEE [[email protected]]