Kuala Lumpur, Malaysia – In one of his first appearances of the year, South Korean President Yoon Seok Yeol pledged to boost confidence in the country’s stock market, which is famed for being undervalued compared with its peers.
As the curtain closes on 2024, Yoon has achieved the opposite, rattling markets with a short-lived declaration of martial law that has thrown Asia’s fourth-largest economy into its biggest political crisis in decades.
“South Korea is supposed to be the bulwark,” Geoffrey Cain, the author of Samsung Rising and a managing partner at Alembic Partners, told Al Jazeera, describing the country as an exception to rising authoritarianism in a region where China’s influence looms large over economies from Hong Kong to Taiwan.
“But even its economy is not safe from political interference. Martial law spooked the markets and this shows that South Korea is not as stable as market analysts often assume.”
With the National Assembly poised to vote on Yoon’s impeachment on Saturday, the president’s future hangs in the balance.
Yoon has rebuffed calls to step down, and the leader of his conservative People Power Party (PPP) on Thursday announced that he would oppose the impeachment effort, casting doubt on its chances of success.
PPP leader Han Dong-hoon told reporters that while he could not defend Yoon’s “unconstitutional” declaration of martial law, he would seek to unify his party against the motion to prevent “chaos”.
With the centre-left Democratic Party (DP) and other opposition factions holding 192 seats in the 300-member National Assembly, the opposition bloc needs at least eight conservative legislators to cross the aisle in order to reach the two-thirds threshold required for impeachment.
If the motion is successful, South Korea’s Constitutional Court would then rule on whether to confirm Yoon’s removal from office – a process that would likely take months.
South Korea’s benchmark stock index, the KOSPI, fell as much as 0.9 percent in early trading on Thursday, after closing 1.44 percent lower the previous day.
South Korea’s won fell to a two-year low against the US dollar on Wednesday before recovering much of the ground it lost.
“The market reaction so far has been modest. It appears that the Korean government is mobilising a contingency plan and it remains to be seen how fast it could bring things back to normal,” Yeo Han-koo, a former South Korean trade minister who is now a senior fellow at the Peterson Institute for International Economics, told Al Jazeera.
“If the political turmoil is prolonged, that could negatively affect the confidence of investors, consumers and buyers, though. The stabilisation of the political environment will be critically important.”
While the fallout has been relatively contained so far, a protracted standoff would be the worst outcome for South Korea’s financial markets and the broader economy, analysts say.
“I think the danger might occur if the president decides to dig in, refuses to resign and his party doesn’t vote for impeachment,” Gareth Leather, senior economist for Asia at Capital Economics, told Al Jazeera.
Leather said Thailand, which has been racked by political turmoil since a 2006 coup, is an example of how dysfunctional leadership can stifle the economy.
“The dispute between the two sides hasn’t really gone away even though it’s 18 years on,” Leather said.
“And you can see quite clearly from the data there that it has really affected the economy, that investment has been super depressed, that growth has really struggled and a large part of that can be traced back to the political dysfunction that bedevils the country.”
While South Korea is home to globally renowned corporate giants such as Samsung and Hyundai, stocks of South Korean firms have long been viewed as undervalued compared with their global peers.
Apple’s market capitalisation is some 14 times the size of that of Samsung Electronics, the crown jewel of the sprawling Samsung Group, despite its revenues being only about a third higher than its Korean rival.
The so-called “Korea discount” has been attributed to several factors, including the country’s proximity to North Korea and poor corporate governance at the family-run “chaebol” that dominate the economy.
After Yoon’s pledge in January to undertake “bold” reforms to boost the stock market, his administration rolled out a series of measures, including an index focusing on companies that have improved capital efficiency and tax benefits for firms that boost shareholder returns.
Despite some initial positive reaction from investors, the measures did little to lift the market.
Even before Yoon’s martial law declaration unnerved investors, the KOSPI was down about 14 percent compared with July.
The stock market’s weak performance comes as South Korea’s economy is faltering, amid slowing demand in China and expectations of hefty tariffs under United States President-elect Donald Trump.
Gross domestic product grew just 0.1 percent during the July-September period, central bank data showed on Thursday, following a 0.2 percent contraction during the previous quarter.
Last year’s growth rate of 1.4 percent was the weakest performance, excluding the COVID pandemic, since the aftermath of the 2008 global financial crisis.
“This incident won’t do lasting damage, but it will spook people,” Cain, the author, said, adding that South Korea’s status as an economic powerhouse “isn’t guaranteed forever”.
“South Korea now has to deal with longer-term problems of a collapsing workforce population, export competition from Taiwan, geopolitical threats from China, and a deindustrialising economy.”
However, despite the political uncertainty and economic headwinds, analysts point to South Korea’s strong economic fundamentals and institutions as a cause for optimism.
“The swift rejection of martial law by the National Assembly and the public makes me hopeful – there remain for now strong institutional checks, high civic engagement, and democratic safeguards,” Pushan Dutt, a professor of economics and political science at the Singapore campus of business school INSEAD, told Al Jazeera.
“Right-wing populists have held Viktor Orban as a model. In an era of democratic backsliding, South Korea will be held up as a model.”
Soohyung Lee, a member of the Monetary Policy Board at the Bank of Korea and a professor at Seoul National University, said she does not believe the current political crisis will have a lasting negative effect on the country’s economy or reputation.
“While the event was unexpected and introduced some uncertainty, it also highlighted the strength of South Korea’s rule of law,” Lee told Al Jazeera, stressing that her views do not necessarily reflect the official positions of the Bank of Korea or Seoul National University.
“The swift and orderly response demonstrated that the country is equipped to address unforeseen political challenges without allowing any individual or small group to derail the system.”
South Korea has emerged from adversity in a stronger position before, Lee said, pointing to the country’s swift recoveries from the 1997 Asian financial crisis and the 2008 global financial crisis.
“Drawing on this history of resilience and adaptability, I remain optimistic about the future of the Korean economy,” Lee said.
Yeo, the former trade minister, said many developed countries have recently experienced challenges to their democracy.
“I think that any country could be exposed to this kind of risks. I think there exist both ‘Korea premium’ as well as ‘Korea discount’,” he said.
“Korea has strength in its cultural soft power, high tech and manufacturing sectors, but also weakness in political and geopolitical tension and corporate governance, etc. It is all about how to capitalise on such ‘Korea premium’, while rectifying ‘Korea discount’.”