Asia Centric by Bloomberg IntelligenceWhat Impeachment Means for South Korea's Economy
South Korea's short-lived martial law and impeachment of President Yoon Suk Yeol has shocked the world and crushed confidence in Asia's fourth-largest economy. Even before these events, the country was suffering from sluggish economic growth combined with the worst-performing stock market and currency in the region throughout 2024. What's next for South Korea's political process and what will it take to revive its financial markets?
Hyosung Kwon, an economist at Bloomberg Economics in Seoul, joins John Lee and Katia Dmitrieva to discuss the political and economic risks that lie ahead for South Korea.
You're listening to Asia Centric from Bloomberg Intelligence, the podcast that explores the big ideas in trends moving money across the region.
I'm John Lee in Hong Kong, and I'm Katid Mitariva, also in.
Hong Kong, Kantia. They say a week is a long time in politics.
Yeah, two weeks is even longer.
Yeah, And so much has happened in South Korea so quickly that it's important to note that we're recording this episode on Monday afternoon on December sixteenth.
Yeah, because a lot can happen between now and Thursday, when the episode actually airs. So this is what we know up until now. President Yunon was impeached Saturday, and the Prime Minister has taken over daily duties. The Constitutional Court is now reviewing the matter and the first court date is set for December twenty seventh.
And Korea's financial markets took the impeachment news quite positively in the morning, but I've noticed that it's pared back some of the games. It seems some investors are worried about Korea's longer term economic outlook. Discuss creates politics, financial markets and the implications for the economy. Is your song quan economists for Bloomberg Economics based in Soul. Her song Welcome to Age Centric.
Thank you John, Hello Kacia, I'm really happy to join this podcast.
Your song always in soul for a brief trip. On the day that the martial law was announced in Koreer and the atmosphere there was one of bewilderment, anger and concern. But now we've had the impeachment. What's the mood like in soul right now?
So, especially today, I think the mood in soul is kind of normal as usual, but I feel a little bit tense in the mood, and especially when we have a conversation with our friends or colleagues, we always talk about the martial law declaration and the impeachment and what we're going to happen.
Yeah, you said that the mood is still kind of tense. So is that because of this sort of you know, there is a bit of certainty in that Unit is impeached, but now it's at the court level and it could trigger an election and all this other stuff. So is it kind of the uncertainty of it all?
I think so. Yeah. So even in president Unit is in peach now there is a lot of uncertainty how long it will take constitutional court to review the impeachment, and then also there's uncertainty about what would be the final decision. And then after that, it actually he's impeached, then we will have a new presidential election. Then who will win the next presidential election and what would be the impact for South Kost' economy.
You've lived in Seoul for your entire life.
Actually I started living in Seoul since I went to university.
So you've been in Seoul since kind of university. Has anything like this happened before that, as you can remember.
The last time it happened was twenty sixteen when Dan President Bagune was impeached. At that time, the mood was a little bit more optimistic and upbeit because the president was impeached after a long period of the demonstration of people. At that time, as you might see currently from the video clip that young people gathered on the street and chanting songs, you know, as if it's a concert or a festival. At that time, it was similar to but there was no such event like declaration of martial law. So I think this time the condition in Seoul is a little bit more tense and it's more a little bit serious.
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So before the very recent martial law declaration? Last time the martial law declaration was in nineteen seventy nine when the President Bak Junkie was assassinated and after that, the General John du One investigated President bux assassination and during the investigation, General John Juhan declared martial law and then he took the power and then he became the president.
I was noticing that from the coverage here in Hong Kong in Seoul where you had after the impeachment was announced, there were just people crying in the streets and hugging each other, and it seemed to really kind of stir for a lot of people that historic moment as well, because that was a very difficult time at a very different time in South Korean.
Yeah, so it was more than forty years back when the declarature martial law was imposed. It means the Korean society going back to like almost four decades ago, right, So I think it might shock a lot of people and then like stirred their feeling and mood.
Yeah, and this generation, I'm not used to this type of political environment. And I'll be the first to admit I actually looked up on Wikipedia what a marshal law entails.
I think you and everyone else though, Yeah, is there a curfew?
Can I go out? Can I leave the country? It was very frightening.
Exactly the same here. In fact, I have to write a react on the declaration martial law. When I publish my react, I need to decide, you know, the react should be published under my name or not, And then I chose to publish it anonymously under the name of the Bloomberg News, because if the martial law is actually imposed, I don't know what will happened to me, right.
Yeah, because the media would lose freedoms as well. There are a lot of kind of elements of marshal law, but one of them is that the media and free speech is suspended.
Right, So one of the announcements by the decree of martial law was that any activity of politics and the media is suspended. And at the end of the announcement present you said that if the residents and interns will not return to the hospital, there will be punished seriously. So other people might take that quite you know, seriously.
Well, thankfully for us. You know, the marshal law only lasted for six hours's martial art history. Now the president has been impeached, what do you think is the most likely outcome.
I think he is most likely to be actually impeached, but he's now impeached by the National Assembly, and I think the Transitional Court will determine that emvestment legitimate, so I think he's more likely to be removed from his office. But the question is when the decision will be made.
So it could be matter of a couple of months to six months do you think, or.
Up to six months, But well, some people expect that this time the wrongdoing of president is quite obvious, so it might take shorter. But no, actually, right, there's job So.
If the Constitutional court upholds the impeachment, then there'll be a snap presidential election.
Right, the snap presidentship election will be within two months. Let's say if the Constitutional Court uphold the impitchment move in April, then what will have a snap election in June?
Yeah, so essentially right now we're waiting John, as you mentioned, rain for the Constitutional Court to rule. Once they do rule, they might uphold what lawmakers just voted on. If they do, there'll be a snap election. If there's a snap election, it looks like, according to polls, the most likely candidate is the leader of the opposition. Now we were just chatting before this episode, John and I, and you know, the leader of the opposition has been front and center and all this, but he's also a bit of a risk, right for markets, but also for the economy. More broadly, there's these two main political parties in South Korean. One of them is a bit more pro US and one of them is a bit more pro China and whereas you and it was a bit more pro us. You have this candidate or could be a candidate who's a bit more leaning towards China. So I wonder if you could unpack that just a bit, like as an economist, you're looking at first of all, all of this uncertainty and then with the certainty there's also risk. So how do you look at that.
It's very difficult to assess the risks because, as you mentioned, the leader of the Democratic Party, jig Fasis is your own legal risks, right. So that's why how soon the Constitution of cult ruling will be made is very important. So if constitutional court ruling is delayed, then we might see the court ruling about Jem Yong's case, then it might make him less eligible for a candidate or questionident.
Yeah, and just to recap for the listeners, you're mentioning that the opposition party leader E JM Yong, he received a suspended jail sentence for breaking electoral laws, so he's got quite a lot of skeletons in the closet as well. It sounds almost very parallel to what happened in the US elections. But back to Katia's point. You know, President Yun was quite well known for being pro us. I remember he visited Washington, d C. And he actually did a rendition of American Pie to Joe Biden, so he was very pro us. If the opposition party gets into office, now, I know we're making a lot of assumptions, but that's less US focused and much more consideraty towards North Korea and China. This could also bring about some more geopolitical risks.
Know, at this point, what I understand is, as you mentioned that President Yun is more for US and the opposition leader is Jam Young is more for China and pro North Korea. So if he actually elected as hasan is total assumption, right, and then I think we might have some sort of tension between the US and Korea and also between Japan and Korea. At the same time, it could be possible that South Korean government will have more friendly relationship with North Korea. During the UNI's administration reign, it was rejected by President Yun. Right, North Korea is sort of enemy as in the Cold War ends, but Risemion has a different perspective. So in terms of geopolitical risks, we have more pressure and at the same time less pressure from the North Korea.
Well, speaking of the US, President elect Trump becomes President Trump on January twentieth, and we know that he is keen on issuing a lot of tariffs. And South Korea is a very trade dependent country. So how are you looking what's your base case for the economy next year in twenty twenty five, because this is something that markets are as you said, John and the opening, I mean, this is what markets are looking at.
So South Korea is export dependent economy, right, and then large share of exports directly goes to the US, and another large share of experts goes to China to be manufactured to be expert to the US. So probably the great share of Korea's product final destination is the US. And then present elect Trump try to have new trade relationship with all of the country China, even South Korea. So his policies would have a from a perspective, quite significant downside risk to South Korea's economy. But it really depends on how he will initiate his tetle power losses. According to our Bloomboo Economics baseline scenario, the Trump administration will start trade war with China on the second half of next year and then the rest of the world in twenty twenty six. So in that case, the burden from the Trump administration trade policy would hit the economy, particularly in twenty twenty six, not twenty twenty five.
So South Korea kind of off the hook initially.
Right right, That is our Bloomberg Economics baseline scenario. But in addition to that, I think South Korea have its own vulotability because South Korea experts rely on the US demand. At the same time, South Korea is enjoying a huge amount of trade SURPERUS with the US, which will make a present Electron unhappy.
Of the target of Trump.
Yeah, so that he will try to crack that trade relationship through a renegotiation of Korea US Free Trade agreement or you know, urging Korean government to import more US goods including energy or arms.
When does it start eating away at GDP? You know, the political uncertainty. First of all, do you see the martial law in the past two weeks and the uncertainty hitting GDP at any point? And also all this US tariff uncertainty as well, Does that hit South Korea's economy at any point.
I think it is already happening, already hitting the South krist economy because right after the martial law, people sentiments started to deteriorate. And also during this time we tend to have the e N gathering for some gap style and soldio. But nowadays I hold from news that many people canceder gathering, you know, so yeah.
Some gap style is pork Bobby Pool, Yeah, for international listeners.
So the impact is already happening. And then another wordy I have is that due to the martial law and impeachment, I think the government lasts some momentum to spend fiscal expenditure in December, so that we might see decline in government expenditure in the fourth quarter. So that will probably reduce growth for twenty twenty four and then its impact will continue next year.
And also before you joined Bloomberg Economics, you were actually working at the Bank of Korea and I wanted to touch on monetary policy. Career is one is really weak? What's the monetary policy going forward? Like the Bank of Korea seemed to be on the path of cutting rates, but now you've got this weak economy. You've got weak growth on one side, weak effects on the other what's the path going forward.
I think Bank of Korea's monetary policy direction is quite clear now. As you mentioned, John, further cutting rates is on the horizon, and the only question is how fast it my move and then how far it will cut interest rates. So as I Lady mentioned that the discent political crisis, Lady started eating GDP this month, and then the households and business sentiments is deteriorating. So I think the BOK will start cutting from January after it delivered back to back interest records in November, after it started easing monetary policy in October.
So they won't be I'd all be worried about trying to protect the ethics.
Right, So yeah, fact is a tricky issue. Bank of Korea should pay attention to pleasures under one. But I think at this point the more risk is the downside risk to growth because in some sense, the weak one is driven by a strong US dollar. So I think even if we didn't have this political instability, the market expected the one would have depreciation pressure due to the well incoming Trump administration trade policy and then Chinese willance depreciation pressure, so market expected that Korean ie would have depreciation pressure from the week Wian because one is considered as a prox currency to Chinese van. So the bottom line is that the one is already under pressure, but now we have new shock to South Korea's real economy, and then be Okay should take care of this is downside risk to real economy and then for the FX market it will do some smoothing operation and then possibly to just its pace up rate cutting.
Is there a sense that like the balance there between the currency and the risk of Trump? In other words, a Trump administration would impose these protectionist policies that could be bad for exports and trade, bad for South Korea, but also with a weaker currency, it could make the country a bit more competitive against peers, but specifically against China. So what's the balance there? Is that good or bad?
So, as you mentioned Katya the wikiwe would give some competitive edge to Korean exporters. But the problem is that if the depreciation occurs rapidly, it might lead to financial instability. So the b Okay or probably most of the central bank, what is that the speed up depreciation or sometimes they call it the volatility in the ex market. So as long as the depreciation in the one occurs in an orderly manner or you know, in a measured way, then be okay would allow the depreciation in the one. But if that happens steeply, were sharply, then be okay would interven the market or even just the speed up mantorly easing.
And here, Song, some of the export beneficiaries that you maybe have alluded to and for the listener would be some of the major semiconductor makers like Samsung Electronics, ESK, Heinex, and of course like the auto Giant which is and also which owns motives.
The big guys.
Yeah, a Song, I was thinking this couldn't have happened at a worse time for career. Even before the martial law news, Career's equity market was the worse performing in the Asia Pacific region. I think today I looked at the Bloomberg screen. In local currency terms, it's down six percent year to day. US dollar terms is down sixteen percent, and we mentioned the effects. It's also got the weakest currency in Asia. On the flip side, if you look at what global investors have done, they sold a bit of Korean equities, but as you mentioned in your report, they've been buying some local government bonds. So does that show you that maybe global investors are not heading for the door and they're still somewhat sticking to Korea.
I think so, and I hope so. So. As you mentioned that the forteen investors or global investors continue to buy Korean government bonds, there are two things behind that movement. One is the expectation that rates will go down further because the economy is just slowing down and slowing down more rapidly now. And the other day is the Korea is likely to join the WIKBI next year, which could increase the investor base of Korea treasury market, which will also increase the government bond right, So I think the global investors think that so far, even at this point, it is a good idea to purchase more Korean government bond. But for the stone market, there was an analysis that actually foreign investors wasn't selling Korean stone market, but actually they were selling Korean semiconductor industry. Except for semiconductor industry, foreign investors continued to purchase Korean stocks. So I think it is also good to separate what they are selling or what they are purchasing.
And we talked about global investors. But what about local investors? What are they doing in Korea?
Spooked by the news, the local investors, especially the retail investors, now more interested in investing in the US market than in the Korean styne market.
I think it's everyone right now.
Yeah, because I saw that this year, the year today return of the COSP was negative six percent. It was declining around six percent compared to the US one nastad around thirty percent increase return or the SM five hundred around twenty seven or six percent. So Korean retail investors are not happy with the expected return in the koreanstyn market, and they are moving their money into the US market.
Yeah, and that's quite interesting because when I was in Seoul, I heard there's a new mantra for retail investors in terms of asset allocation that like to put eighty percent of their money to the S and P five hundred and twenty percent of bitcoin twenty percent bitcoin.
Yeah, that's a whole that's a whole other episode. Well, thanks for joining us today. Your son is a great conversation.
Thanks for having me.
I'm Katjadmitrieva in Hong Kong. You can follow me at at Katia Dmi on x or on LinkedIn.
And I'm John Lee also in Hong Kong. You can follow me on LinkedIn by searching John Lee at Bloomberg. And this will also be our last podcast for twenty twenty four. We'll be taking a two week break and we'll be back in early January with a new lineup of great speakers. So thank you everyone.
And the podcast was produced by Clara Chen. You can find her on the terminal or on LinkedIn. You can also follow Asia Centric on Spotify, Apple Podcasts, or wherever you listen. You can also find us at b I Podcast on the Bloomberg Terminal. See you in the new year.
