S Korea prepares $28 billion market stabilization fund after martial law

SINGAPORE (ICIS)–South Korea is preparing to activate a market stabilization fund worth won (W) 40 trillion ($28 billion) following the country’s brief dalliance with martial law, with its slowing economy facing the prospect of increased US tariffs in 2025.

• KOSPI index falls for second day
• Prospective US tariffs to hurt exports
• Q3 GDP growth slows to 1.5% on year, up 0.1% on quarter

At 06:30 GMT, the KOSPI composite index fell by 0.90% to close at 2,441.85, after shedding 1.4% in the previous session.

The Korean won, meanwhile, was trading at W1,415 to the US dollar, off the lows of more than W1,440 on 3 December.

While the fallout of the political crisis on the financial markets appears to be contained, South Korea may be bracing for further volatility next year.

“As the domestic situation coincides with the external uncertainty caused by the inauguration of the new US administration, there is a possibility that volatility will increase, so the relevant agencies will closely monitor the market situation together and take all possible measures,” the Ministry of Economy and Finance said on Thursday.

A task force has been created to check on the country’s overall economic health.

Much of the concern stems from threats of US tariffs on all imported goods, which would affect Asia’s export-oriented economies including South Korea.

Weak external demand caused the country’s overall export growth in November to decelerate to 1.4% year on year.

In Q3, South Korea’s annualized GDP growth slowed to 1.5% year on year due to weakness in both domestic demand and exports, official data showed on Thursday.

This economic weakness prompted the Bank of Korea (BoK) to cut its policy interest rates by 25 basis points twice in two months.

Full-year 2024 and 2025 growth forecasts were trimmed to 2.2% and 1.9% respectively.

On a quarter-on-quarter basis, the fourth largest economy in Asia barely expanded in Q3, but the 0.1% growth represents a reversal of the 0.2% contraction in April-June, according to the central bank.

On the supply side, manufacturing increased by 0.2% on quarter mainly due to increases in transportation equipment and machinery and equipment.

Construction fell by 1.4% and services expanded by 0.2% on a quarter-on-quarter basis.

Exports decreased by 0.2% on quarter as shipments of motor vehicles and chemical products dropped. Imports, on the other hand, rose by 1.6% due to increased demand for machinery and equipment.

The cloudy political climate in the country is not expected to affect South Korea’s sovereign ratings and growth prospects, S Korean central bank governor Rhee Chang-yong was quoted by local news agency Yonhap as saying in a press briefing.

“The martial law declaration was purely out of political reasons. We can separate such political events from economic dynamics,” Rhee said.

He noted that the Korean won, which “weakened due to the negative news” is forecast to “gradually rise if there are no new shocks”.

The won tumbled to a near two-year low of W1,444 against the US dollar on 3 December, but eased after martial law was lifted some hours later.

Impeachment motions lodged at the National Assembly against South Korean President Yoon Suk-yeol are up for voting on 7 December.

“It is hard to forecast how things will unfold regarding the impeachment process, which adds uncertainties to the market.

“But I also believe that the matter is not likely to give a shock to the market if history serves as any guide,” the central bank chief said, as reported by Yonhap.

In a separate development, unionized workers of national railway operator Korea Railroad Corp (KORAIL) launched a strike from Thursday after failing to reach a wage agreement, according to media reports.

Focus article by Pearl Bantillo

Additional reporting by Fanny Zhang

Thumbnail image: Members of Korean Confederation of Trade Unions (KCTU) and civic groups hold placards and lighted candles during a demonstration calling for the dismissal and impeachment of South Korean president in Seoul, South Korea, 4 December 2024. (JEON HEON-KYUN/EPA-EFE/Shutterstock)