South Korea flags economic risks as political turmoil rumbles on

SOUTH Korea is facing greater downside economic risks as it tries to mitigate the impact on its currency of the turmoil triggered by last week’s martial law declaration, its finance minister said on Wednesday (Dec 11).

“Downside risks are increasingly growing,” Finance Minister Choi Sang-mok said at a National Assembly hearing. “We’re doing our best to stabilise foreign exchange markets through smoothing operations, which are common in other countries.”

South Korea is engulfed in political turbulence following a bungled martial-law attempt by President Yoon Suk-yeol last week. Even though the parliament voted to nullify it, forcing Yoon to retract his decree, stock markets are struggling to return to previous levels and the South Korean won at one point depreciated to the worst level against the US dollar since 2009 and the aftermath of the global financial crisis.

In the worst-case scenario that uncertainty over political leadership continues for several months, South Korea’s economic growth may suffer a 0.2 per cent hit, Nomura Holdings economist Jeong Woo Park said on Wednesday.

“In that case, the Bank of Korea would need to do more” to stimulate the economy, he said in Hong Kong.

The BOK trimmed its benchmark interest rate last month in a back-to-back cut after finally pivoting on policy following a battle against inflation.

In projections released after the decision, the central bank forecast the South Korean economy would grow 2.2 per cent this year and 1.9 per cent in 2025, revising its earlier estimates down. The BOK will update its forecasts in February.

Shortly after Yoon declared martial law on Dec 3, BOK governor Rhee Chang-yong joined Choi and pledged “unlimited liquidity” if necessary. Choi said on Wednesday he was shocked and strongly objected to Yoon’s plan to impose martial-law when he first heard about it during a Cabinet meeting.

Last week the BOK bought 14.1 trillion won (S$13.1 billion) of bonds via repurchase agreements as part of its efforts to stabilise markets, the central bank said on Wednesday.

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Choi spoke with US Treasury Secretary Janet Yellen overnight and discussed economic and financial developments, and reaffirmed strong ties “built upon shared democratic values,” according to a Treasury statement.

The worst of the moves in the won seem over following a recovery in levels since last week’s slide. South Korea regularly dips into the foreign exchange market to take the edge off sharp movements rather than standing on the sidelines for longer and then conducting larger-scale interventions. South Korea is on the Treasury’s watchlist over its currency policy.

South Korean authorities sold a net total of US$9.15 billion as they stepped into the foreign exchange market during the four quarters up to June, according to BOK intervention data. In one of those quarters they were net buyers of US dollars.