South Korea's Political Crisis: Impact on Asian Markets

January 15, 2025: South Korea’s ongoing political crisis is causing significant volatility in Asian financial markets. President Yoon Suk Yeol’s declaration of martial law in December 2024, followed by his refusal to cooperate with legal investigations, has created deep uncertainty. The Constitutional Court deliberates on impeachment, while the opposition Democratic Party pushes for immediate elections. This instability has rattled both domestic and international investors.

The South Korean won has plunged to its lowest level in 16 years, trading near values last seen during the global financial crisis. The Korea Composite Stock Price Index (KOSPI) has also suffered, reflecting widespread market jitters. Foreign investors have withdrawn over 17 trillion won from Korean treasury bonds since December, signaling a severe loss of confidence in the nation’s financial stability.

Business confidence has sharply declined. The Bank of Korea’s Composite Business Sentiment Index dropped to pandemic-era lows, highlighting widespread corporate unease. Weak export growth reduced consumer spending, and falling tax revenues—down 8.5 trillion won in the first 11 months of 2024—compounded economic strain.

Global factors are worsening the situation. Donald Trump’s return to the U.S. presidency introduces additional risks. His previous comments labeling South Korea a “money machine” and hints at demanding increased military spending from Seoul have raised concerns. Moreover, Trump’s plans to expand tariffs could exacerbate U.S.-China trade tensions, directly impacting South Korean industries reliant on Chinese supply chains, including electric vehicle battery manufacturers.

If Yoon is impeached, a snap election could favor the opposition Democratic Party, which is known for less favorable policies to large corporations. Their stance on increasing corporate taxes and regulating industries raises concerns, particularly for sectors like nuclear energy, where prior governments reversed policies, creating an unpredictable regulatory environment.

South Korea’s political instability is now a critical factor influencing Asian markets. It could lead to prolonged economic downturns, capital flight, and reduced foreign investment if unresolved. Businesses may need to diversify regional investments and hedge against currency risks to navigate the uncertain landscape.