South Korea's Resilient Financial Markets Weather Political Turmoil

South Korea has demonstrated remarkable financial stability despite grappling with a significant political crisis. This resilience underscores the maturity of its markets, buoyed by swift and strategic interventions to reassure investors.

Global funds were net buyers of South Korean government bonds in December, and the cost of insuring the country’s debt against default rose only modestly, reaching a four-month high. This indicates that investor confidence remained intact, even as President Yoon Suk Yeol’s December 3 bid to impose martial law shocked the nation, threatening democratic principles and resulting in his impeachment by lawmakers.

Crisis Response Bolsters Investor Confidence

At the core of investor confidence was the swift response from top financial authorities, which earned praise from major players such as Canadian Imperial Bank of Commerce, abrdn Plc, and Straits Investment Management. These efforts were built on Korea’s ongoing modernization of its market infrastructure, a move aimed at securing inclusion in FTSE Russell’s bond index alongside developed markets like the US and Germany.

“We think of Korea as a developed market within emerging markets,” said Leonard Kwan, a portfolio manager at T. Rowe Price. The government’s efficient handling of the crisis “enhanced its standing, showing that institutions worked as designed, with guardrails in place.”

When the martial law crisis unfolded overnight, financial authorities quickly pledged liquidity support to calm markets. Near-daily meetings were held in subsequent weeks to ensure stability. A similar approach was taken on December 30 following the country’s worst civil aviation disaster, which claimed 179 lives.

Resilience in the Face of Volatility

Data from credit default swaps suggests investors viewed the situation in Korea with less alarm than Turkey’s attempted coup in 2016, which triggered sovereign rating downgrades. While the Korean won suffered the steepest losses among Asian currencies in the fourth quarter, analysts attributed this partly to a strong US dollar and global trade uncertainties tied to Donald Trump, rather than solely to domestic political unrest.

“The finance ministry and the Bank of Korea managed the shock effectively,” noted Maximillian Lin, an Asia FX strategist at CIBC. Although the won and stocks initially fell, “the price action did not indicate widespread market panic.”

A ban on short selling, in effect for over a year, likely mitigated the potential for a stock market rout. However, this restriction has also hindered Korea’s aspirations for developed market status from MSCI Inc.

In the fixed income market, yields on South Korea’s 10-year benchmark bonds rose, even with the possibility of central bank rate cuts, signaling that these securities are not perceived as safe havens. Moreover, while overseas investors bought a net 1.86 trillion won ($1.3 billion) in government bonds in December, this was lower than the nearly 3 trillion won purchased in the same month a year earlier, according to data from the Korea Financial Investment Association.

Political and Economic Uncertainties Persist

Broader uncertainties linger as political and economic challenges mount. On December 27, parliament voted to impeach Acting President Han Duck-soo, raising fears of a leadership vacuum. President Yoon’s impeachment awaits a final ruling from the Constitutional Court, which could take months.

Meanwhile, the economy is showing signs of strain. The Finance Ministry lowered its 2025 growth forecast, and business confidence plunged to its lowest level since the early days of the Covid-19 pandemic. Korean stocks were Asia’s worst performers last year as global trade headwinds intensified for the export-reliant nation.

“A prolonged period of political conflict that disrupts economic activity, particularly amid a severe healthcare worker shortage, would be credit negative,” warned Anushka Shah, a senior credit officer at Moody’s Ratings.

Long-Term Stability Remains Intact

Despite these challenges, concerns over South Korea’s financial stability remain minimal. In 2024, authorities implemented measures to enhance market access, such as extending trading hours for the won until 2 a.m. local time. This shift contrasts with previous policies that restricted foreign exchange trading to a few hours daily, aimed at preventing speculative attacks on the currency.

“Political volatility has caused short-term disruption but has not had a significant long-term impact,” said Yi Ping Liao, assistant portfolio manager at Franklin Templeton. “Even amid turbulence, South Korean companies, particularly global leaders, continue to thrive on the world stage.”

South Korea’s financial markets have proven their resilience, navigating political turmoil with minimal disruption while reinforcing their reputation as robust and mature.