Investment banks warn political disorder threatens to stall economy

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Investment banks warn political disorder threatens to stall economy

Published: 09 Dec. 2024, 18:17 Updated: 09 Dec. 2024, 18:19

SARAH CHEA
[email protected]

Audio report: written by reporters, read by AI

The Goldman Sachs logo is seen at the New York Stock Exchange in New York during morning trading on August 25, 2023. [AFP/YOHAP]

Global investment banks have warned that the ongoing political and social unrest in Korea will aggravate its already-gloomy economic outlook, adding another layer of uncertainty to the fourth-largest economy in Asia.

While they have yet to lower their growth forecasts for the country for next year on the back of the shocking martial law proclamation on Dec. 3, they did address the "risks of downsides" as the country's stock markets have been struggling with sluggish trading since midyear.

"The risks increasingly skew to the downside," Goldman Sachs economist Kwon Goo-hoon said in a report titled "Korea Views: The Aftermath of a Brief Martial Law Episode" published Monday, adding that the investment bank maintains "a below-consensus growth forecast of 1.8 percent for Korea for 2025."

The report clearly emphasized that the circumstances regarding an attempt to impeach President Yoon Suk Yeol differ from two past attempts to oust presidents — once with a motion in 2016 against former President Park Geun-hye and another in 2004 against the late President Roh Moo-hyun.

"The two earlier impeachment cases, for which political instability did not weigh meaningfully on growth, do not provide a good benchmark, in our view. The Korean economy in the previous two cases was influenced by external tailwinds from China's boom in 2004 and a strong upturn in the semiconductor cycle in 2016."

"Conversely, in 2025, Korea together with other export-oriented economies in the region face external headwinds from a slowdown in China and U.S. trade policy uncertainties," Kwon said.

Korea's Kospi and Kosdaq faced sharp declines after President Yoon Suk Yeol's shocking emergency martial law declared on the night of Dec. 3. [YONHAP]

In fact, Korea's Kospi bourse, which stood at 2,024.69 on the day the National Assembly voted to impeach Park on Dec. 9, 2016, surged to 2,097.35 on March 10, 2017, when the Constitutional Court made a historic ruling upholding impeachment.

The uncertainties are nearing an inflection point after the impeachment motion against Yoon was dismissed in the National Assembly following a walkout by most lawmakers of his People Power Party on Saturday.

Morgan Stanley also warned of risks in investing in Korea considering a potential impeachment in an uncertain political environment, adding that many investors have expressed worries over Korean stocks.

The global investor group already lowered its GDP growth forecast for Korea in 2025 from 2 percent to 1.7 percent, and downgraded its rating for Korean stocks from "Equal-weight" to "Underweight."

Hong Kong-based CLSA also assessed that the recent political turmoil adds to the risk for Korean stocks, which have already been showing "underwhelming" movement since July.

Britain's Barclays cited the potential risks of a delayed budget for next year, which could harm domestic consumer demand and weigh down an economic recovery.

Experts in Korea warn that prolonged political unrest will inevitably influence corporate mid- and long-term profitability.

"For foreign investors, Korean stocks are appealing price-wise, but the political uncertainty makes them hesitate to invest," said Mok Dae-Kyun, chief investment officer at KCGI Asset Management.

Foreign investors net purchased 797 billion won ($555.9 million) in the afternoon on Dec. 3, the day Yoon declared martial law, but dumped some 1 trillion won shares over the four following sessions.

"The prolonged uncertainty may force [the country] to miss the timing for an expansionary policy and delay diplomatic relations with the incoming U.S. government, making it difficult to find momentum for a rebound," said Global Bond Investment Advisor CEO Ma Kyung-hoon.

BY SARAH CHEA, AHN HYO-SEONG AND KIM YEON-JOO [[email protected]]