South Korean markets ride out political crisis as global debt funds keep buying
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Global funds were net buyers of government bonds in December, as swift response to calm markets won praise from investors.
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SEOUL - South Korea was spared a financial maelstrom even as it battles a political crisis, underscoring the extent to which its markets have matured, bolstered by swift efforts to reassure investors.
Global funds were net buyers of government bonds in December, and the cost to insure South Korea’s debt against default hit only a four-month high.
This suggests investors maintained confidence in the country despite President Yoon Suk Yeol’s failed bid to impose martial law on Dec 3 – a shocking move that threatened its democratic foundations and led to his impeachment by lawmakers.
At the heart of faith in South Korea is the crisis response by the top authorities, which won praise from investors.
This followed efforts to modernise the nation’s market infrastructure to secure a spot in the FTSE Russell’s bond index for countries such as the US and Germany.
“We think of Korea as a developed market within emerging markets,” said Mr Leonard Kwan, portfolio manager of T. Rowe Price Group’s dynamic emerging markets bond strategy. The episode has actually enhanced its standing, since the “institutions have worked as designed and the guard rails are in place”.
South Korea’s martial law crisis unfolded at night and, in the early hours, the financial authorities responded to the situation by pledging liquidity support to calm investor jitters.
They held near-daily meetings in recent weeks to ensure market stability. They took similar action on Dec 30 following the country’s worst civil aviation disaster, which claimed 179 lives.
Credit default swap data suggests that investors were less concerned about South Korea than about the attempted coup in Turkey in 2016, which led to sovereign rating cuts.
While the South Korean won racked up the biggest losses among Asian currencies in the final quarter of 2024, investors say part of that drop is due to a strong US dollar trend and global trade risks linked to US President-elect Donald Trump, rather than domestic politics.
“The Finance Ministry and the Bank of Korea handled the shock well,” said CIBC Asia FX strategist Maximillian Lin.
Although the won and stocks were sold off in the immediate aftermath of the martial law declaration, “the price action did not indicate widespread market panic”, he added.
To be sure, the government’s ban on short selling has likely helped stanch a stock market rout.
The restrictions, which have remained in place for more than a year, are considered an impediment to the country’s efforts to win developed market status from MSCI.
On the fixed income front, the country’s 10-year benchmark bond yield has risen despite the prospect of central bank interest rate cuts, suggesting the securities are not seen as a haven.
Moreover, while overseas investors bought a net 1.86 trillion won (S$1.7 billion) of government bonds in December, it is less than the almost 3 trillion won they added in the same month in 2023, data by the Korea Financial Investment Association shows.
The wariness reflects broader uncertainties, as it remains too early to signal an all-clear for risk-on sentiment.
On Dec 27, Parliament voted to impeach Acting President Han Duck-soo, intensifying concerns over a leadership vacuum.
Mr Yoon is awaiting a final decision by the Constitutional Court on his impeachment, which can take months to be delivered.
And the economy is showing signs of strain. The Finance Ministry lowered its growth forecast for 2025, and business confidence deteriorated the most since the onset of the Covid-19 pandemic.
South Korean stocks were the worst-performing in Asia in 2024, as headwinds mounted for the export-driven country.
“A prolonged period of political conflict that impacts economic activity and leads to work stoppages, particularly exacerbating current challenges from a severe healthcare worker shortage and hindering economic confidence, would be credit negative,” said Moody’s Rating senior credit officer Anushka Shah.
Yet, despite the bouts of market volatility, there are few concerns over the stability of South Korea’s financial system.
In a bid to court foreign funds and win inclusion in flagship indexes, the authorities took steps in 2024 to improve market access, such as extending trading hours for the won until 2am local time.
This marks a shift from the past, when the government limited foreign exchange trading to just a few hours a day on fears that global investors might launch speculative attacks on the currency or sell off their holdings at the slightest hint of trouble.
“Political volatility has created short-term disruption, but it has not had a meaningful, adverse impact from a long-term perspective,” said Franklin Templeton assistant portfolio manager Yi Ping Liao. “Regardless of this turbulence, South Korean companies, especially some of these global leaders, have continued to thrive on the global stage.” BLOOMBERG
