INSIGHT: Political instability rocks South Korea after martial law; no petrochemical impact so far

SINGAPORE (ICIS)–Days before the shock declaration of martial law in South Korea by President Yoon Suk-yeol, political wranglings stalled the 2025 budget deliberations of Asia’s fourth-biggest economy.

• Opposition DPK wants heavy cut in 2025 national budget
• Impeachment looms for President Yoon
• No impact on petrochemical operations/trades

“Tensions between the ruling PPP [People Power Party] and main opposition Democratic Party of Korea (DPK) have escalated as both sides have been unable to come to a consensus on the budget,” according to BMI Country Risk & Industry Research, a unit of Fitch Solutions Group in a note on Wednesday.

DPK has proposed heavy cuts – to the tune of won (W) 4.1 trillion ($2.9 billion) – to the Yoon administration’s proposed budget of W677.4 trillion for next year, which represents a 3.2% increase from 2023.

“As things stand, Yoon’s proposed 2025 budget … faces the risk of being watered down to KRW673.3trn amid strong opposition from the DPK which holds a parliamentary majority,” BMI stated.

QUITE AN UNEXPECTED MOVE
Most South Koreans, including players in the petrochemical industry, like the rest of the world, were baffled at Yoon’s declaration of emergency martial law late on 3 December.

The last time the highly industrialized country in Asia faced martial law was in 1979, and no recent developments in the geopolitical and financial sectors of the country indicated that such a drastic measure would be taken.

At close to midnight, Yoon had declared martial law – which meant military rule and curbs on civil rights – on national television noting that it was meant to crack down on pro-North Korean forces and protect the constitutional order in the country.

“Martial law was quite surprising for us to hear because it hasn’t happened in the last 40 years,” said a soda ash distributor.

The declaration of martial law and its withdrawal hours later has thrown South Korea into political instability. It was highly disruptive for market sentiment that for a time, suspension of trading was mulled, but was eventually called off when the martial law was rescinded about six hours after it was declared.

South Korea’s Ministry of Finance and Economy and the Bank of Korea assuaged market fears of disruption by offering “unlimited liquidity support” to ensure market stability, immediately after the martial law declaration.

The won weakened near two-year lows against the US dollar on 3 December at around W1,440 but recovered to around W1,412 levels as of Wednesday afternoon.

The benchmark KOSPI composite index closed off lows at 2,464.00, down 1.44% from the previous day, after falling nearly 2% in intraday trade.

“For now, we expect limited implications for the economy and financial markets as the Bank of Korea and the Ministry of Finance have responded swiftly by reassuring investors,” BMI said.

“Notably, the central bank committed to boosting short-term liquidity and enacting measures to stabilise the FX [foreign exchange] markets, which aligns with our view that risks around the South Korean won, should remain contained for now,” it added.

The central bank held an emergency monetary policy meeting on Wednesday morning, with the Monetary Board deciding “to keep all options open and to actively take market stabilization measures until markets are fully stabilized”.

In late November, the BoK issued its second interest rate cut in as many months to prop up the economy, while trimming its GDP growth forecasts for this year to 2.2%, and for 2025 to 1.9%.

In Q3, the country’s GDP growth decelerated to 1.5% from a 2.3% pace set in Q2.

The South Korean economy is expected to face added pressure next year amid US threats to impose tariffs on all imported goods.

Like most of Asia, the country is heavily reliant on exports, with China and the US as its biggest trade partners.

South Korea’s export growth in November weakened to 1.4% year-on-year to $56.4 billion, while imports shrank by 2.4% to $50.7 billion, indicating domestic weakness.

YOON’S FUTURE UNCERTAIN
Calls for Yoon’s resignation is mounting, with lawmakers from DPK saying that if he does not resign immediately, steps will be taken to have him impeached.

“We anticipate heightened political uncertainty in the near term. Yoon is now under intense pressure to resign. If he does not, we expect that it is only a matter of time before he is impeached,” BMI said.

“If so, we believe Prime Minister Han Duck-soo will step in as interim leader, paving the way for elections to be held within 60 days, in accordance with the constitution,” it added.

According to Korean news agency Yonhap, opposition parties – DPK and five others, including the Rebuilding Korea Party and Reform Party, submitted on Wednesday afternoon a motion to impeach President Yoon to the National Assembly.

The motion – which was signed by 190 opposition lawmakers and one independent lawmaker, with no support from any ruling party lawmakers – will be reported to a parliamentary plenary session on 5 December and then put to a vote on either 6 December or 7 December.

South Korea’s law requires that an impeachment motion be put to a vote between 24 and 72 hours after the motion is reported to a plenary session, Yonhap said.

Yoon, an inexperienced politician, became the 20th president of the country in May 2022 and is currently serving the third of his five years of office. Previously, he was South Korea’s chief prosecutor.

In its note, BMI noted that PPP leader Han Dong-hoon had urged Yoon to explain his decision and to dismiss defense minister Kim Yong-hyun, who advised the president to declare martial law “even as the finance and foreign ministers advised against it”.

“The silver lining we think is that the swift reversal of the martial law underscores the resilience of South Korea’s institutions,” it said.

NO IMPACT ON PETROCHEMICAL TRADES
Players in the petrochemical industry are monitoring the political developments but noted no immediate impact on the commodities markets.

“Politically, [it is] still unstable as the President is getting pressure to resign,” a source at a phenol/acetone producer said.

South Korea is a major exporter of ethylene, as well as aromatics such as benzene, toluene and styrene monomer (SM).

“At this moment the situation has settled down, but we’ll see how the government will respond to the issue,” the soda ash distributor said.

“From the industrial side there is no huge impact because plants/factories are always running at full capacity so now we don’t see any impact,” he said.

“But long-term impact, we’ll need to see how other foreign companies and assets may move out of South Korea,” the distributor added.

For the time being, players are more pre-occupied with unsteady port operations in Daesan because of heavy winds which are affecting trades and cargo deliveries.

Meanwhile, South Korea’s petrochemical industry has its own troubles stemming from Asia’s overcapacity.

In the case of of major player Lotte Chemical, which swung into a net loss of W514 billion in Q3 2024, the company is making big changes to its  portfolio, selling or closing commodities businesses as it refocuses on higher margin specialties.

South Korean industries, including chemicals, rely heavily on exports to China, whose self-sufficiency has grown over the years.

Insight article by Pearl Bantillo

($1 = W1,414)

Additional reporting by Fanny Zhang, Jonathan Chou, Evangeline Cheung, Helen Lee, Shannen Ng, Josh Quah and Clive Ong