Korean financial market endures fallout of short-lived martial law fiasco

Traders work at their desks on the trading floor of a Hana Bank branch in Seoul, Wednesday. Yonhap

By Lee Kyung-min

• Published Dec 4, 2024 4:58 PM KST
• Updated Dec 5, 2024 1:15 PM KST

The Korean financial market experienced less severe-than-expected fallout of the overnight martial law fiasco, underpinned by the financial authorities’ prompt responses that prevented a wide tumbling in foreign exchange (FX) and equity indexes, market watchers said Wednesday.

The main bourse KOSPI dipped to an intraday low of 2,442.46 points, led by foreign net sell-offs of 380.5 billion won ($269 million). It was down further by nearly 2 percent from the opening mark of 2,450.76, 1.97 percent lower than the previous session. Retail investors and institutional investors net bought 321.2 billion won and 37 billion won, respectively. The KOSPI200 futures market lost a net foreign holding of 423.1 billion won. It ended at 2,464.00 points, down 1.44 percent from the previous session.

The Korean currency against the U.S. dollar opened at 1,418.1 won at 9 a.m., and fluctuated in a range of between 1,406 won and 1,411 won. This was a recovery from the overnight plunge to 1,442 won, the lowest level since October of 2022. The currency traded at 1,410.1 won against the dollar, as of 3:30 p.m., down 7.2 won from the previous session.

Observers fear the short-lived debacle could undermine Korea’s foreign credibility, as illustrated by photos and videos of political and social unrest at the National Assembly.

Equally concerning is further weakening in the county’s rebound momentum, hamstrung by an extended economic downturn amid years of a higher-for-longer monetary policy, fiscal austerity and U.S.-championed protectionism under the upcoming second Trump administration.

“We anticipate a spike in political tensions in the near term,” said Yoel Sano, head of Global Political and Security Risk at BMI, a unit of Fitch Group.

A declaration of martial law is highly unusual in a well-established democracy during peacetime, a reason why President Yoon Suk Yeol’s popularity will inevitably drop.

“His approval rating had already slid to the 19-25 percent range before the announcement,” Sano said.

New questions will likely emerge about Yoon’s judgment, in his view, given this incident was the first declaration of martial law following the assassination of Park Chung-hee in October 1979.

“Even Han Dong-hoon, leader of the ruling People Power Party, criticized the declaration as ‘wrong.’ Calls for Yoon to resign or be removed could increase, ” he added.

The silver lining, the economist said, is the resilience of Korea’s institutions, as highlighted by the swift response measures.

“For now, we expect limited implications for the economy and financial markets as the Bank of Korea (BOK) and the Ministry of Economy and Finance have reassured investors with swift actions.”0

This was in reference to the central bank’s pledge of unlimited, ad-hoc repurchase agreements (repos) expansion as well as the Financial Services Commission (FSC) injection of a combined 50 trillion won in stock stabilization funds and Korea Treasury Bonds (KTBs) stabilization funds. The measures followed a meeting of BOK Governor Rhee Chang-yong, FSC Governor Kim Byoung-hwan, Deputy Prime Minister and Finance Minister Choi Sang-mok and Financial Supervisory Service Governor Lee Bok-hyun late Tuesday and early Wednesday. 

The BOK measure expands the repos both in the frequency and in the scope of eligible market participants. The FSC stabilization funds can mitigate a potential surge of plunging won-triggered margin calls.

Previously, the central bank repos were limited to a certain predetermined timeframe. Also limited were the number of domestic and foreign lenders as well as asset managers, central bodies of cooperatives and brokerages.

However, all domestic and foreign branches are eligible for the emergency program, as well as futures trading bodies.

“The short-term liquidity supply measures align with our view that risks around the Korean won should remain contained for now,” he said.

BOK Deputy Governor Park Jong-woo said no FX liquidity stress has been flagged.

“The financial market condition is stable compared to the COVID-19 pandemic or the Legoland crisis,” he said during a presser at the bank. “Market jitters will be limited, aided by the current easing cycle.”

Choi said the government will spare no efforts to stabilize the economy, business activities and the lives of the public.

“We will maintain close communication with global credit rating agencies, economic and financial authorities in the United States and other advanced economies, market participants and financial entities. We will share new developments in a timely manner,” he said during a presser at the Seoul Government Complex in Gwanghwamun.

“The government will operate an around-the-clock monitoring task force. Cooperation will continue to minimize disruptions to exports.”

Cabinet members tendered their resignations collectively. But it was more of a gesture to show that they will not hold onto the position for personal gain. Choi made it clear that he will do his utmost to have the economic situation under control until the end of his term, the finance ministry said.  

Bitcoin traded at 134 million won, Wednesday morning, more than offsetting the overnight loss of about 30 percent in value.

Ripple recovered to about 3,500 won, up from the previous brief low of around 2,000 won.

Upbit and Bithumb users were temporarily unable to access the exchange due to heavy site traffic following Yoon’s announcement.

Yoon declared martial law at 10:28 p.m. Tuesday, citing threats to the country’s political order from pro-North Korean forces. The National Assembly unanimously voted to block the move at 1:03 a.m. and Yoon lifted it about three and a half hours later.