South Korea rushes to stabilise markets after Yoon’s martial law bid

SEOUL - South Korea’s Finance Ministry said on Dec 4 it is ready to deploy “unlimited” liquidity into financial markets if needed after President Yoon Suk Yeol lifted a martial law declaration he imposed overnight that pushed the won to multi-year lows.

The announcement came after Finance Minister Choi Sang-mok and Bank of Korea governor Rhee Chang-yong held emergency meetings overnight, and as the central bank board abruptly met to approve rescue measures for the local credit market.

While financial markets found their footing in Dec 4 trade, with the won higher and stocks trimming some losses, investors remain wary about longer-term political stability in South Korea, which has been seeking to make its markets more global.

“All financial, FX markets as well as stock markets will operate normally,” the government said in a statement.

“We will inject unlimited liquidity into stocks, bonds, short-term money market as well as forex market for the time being until they are fully normalised.”

The BOK said it will start special repo operations from Dec 4 for local financial institutions to support smooth market functioning.

It also said it would loosen repo collateral policies by accepting bank debentures issued by some state-run enterprises.

The financial regulator added it was ready to deploy 10 trillion won (S$9.5 billion) in a stock market stabilisation fund any time, the Yonhap news agency said.

South Korea’s won gained 0.8 per cent as at 2.12am GMT, coming off the two-year low of 1,442 hit overnight after Mr Yoon’s shock martial law declaration.

Local foreign exchange dealers suspected the authorities sold dollars as part of smoothing operations, intervening hard as soon as markets opened to limit a decline in the won.

South Korea’s Parliament, with 190 of its 300 members present, unanimously passed a motion on Dec 4 requiring the martial law be lifted.

Korean shares fell 2 per cent on Dec 4 with chipmaker Samsung Electronics down 1.31 per cent and battery maker LG Energy Solution off 2.64 per cent.

The Kospi index and won are among Asia’s worst-performing assets in 2024.

Overnight, US-listed South Korean stocks fell, while exchange-traded products in New York, including iShares MSCI South Korea ETF and Franklin FTSE South Korea ETF lost about 1 per cent each.

Mr Daniel Tan, a Singapore-based portfolio manager at Grasshopper Asset Management, said over the longer-term, the incident would accentuate the “Korean Discount”, which refers to a tendency for local companies to have lower valuations than global peers.

“A reflection of the Korean Discount, Korea’s equity benchmark Kospi currently trades at 0.8 times one-year forward estimated book value, while the MSCI World Index trades at closer to 3 times,” Mr Tan said. “Investors could require a bigger risk premium to invest in the won and Korean equities.”

Fiscal risks

The political turmoil comes as Mr Yoon and the opposition-controlled Parliament clash over the budget and other measures.

The opposition Democratic Party last week cut 4.1 trillion won from the total budget proposal of 677.4 trillion won that Mr Yoon’s government submitted, putting the Parliament in a deadlock over control of the 2025 annual budget.

The parliamentary Speaker on Dec 2 stopped the revised budget from going to a final vote.

A successful budget intervention by the opposition would deal a major blow to Mr Yoon’s minority government and risk shrinking fiscal spending at a time when export growth is cooling.

“The negative impact to the economy and financial market could be short-lived as uncertainties on political and economic environment could be quickly mitigated on the back of proactive policy response,” Citi economist Kim Jin-wook said in a report. REUTERS