Political Instability Raises Economic Concerns

The recent rejection of the impeachment motion against President Yoon Suk Yeol has sparked significant concerns about the potential economic fallout in South Korea. Adarsh Sinha, co-head of Asia rates and foreign exchange strategy at Bank of America (BofA), warned in an interview with Bloomberg that the Korean won could plummet when the market opens on Dec. 9, highlighting the increasing likelihood of a rate cut amid unfavorable economic conditions and the failed impeachment.

Impact on Financial Markets

The political uncertainty has already begun to impact the financial markets. On Dec. 7, the won-dollar exchange rate surged by 10.86 won from the previous session to 1,424.14 won in the New York Non-Deliverable Forward (NDF) market. This depreciation of the won, which fell by 1.86% against the dollar last week, marks it as the weakest among major currencies.

Economic Projections and Challenges

Nomura Securities projected the won-dollar exchange rate could rise to 1,500 won by May next year, reflecting the ongoing political turmoil. Choi Jin-ho, an analyst at Woori Bank, noted that political noise is a factor causing foreign investors to withdraw funds. Kwon Ah-min, a researcher at NH Investment & Securities, pointed out that the rise in the won-dollar exchange rate during the impeachment of former President Park Geun-hye was not solely driven by domestic political factors but also by strong dollar pressure.

Economic Implications

The economic implications of a weakened won are significant. Ahn Dong-hyun, a professor of economics at Seoul National University, emphasized that the possibility of stimulating prices due to the exchange rate has increased. Ryu Deok-hyun, a professor of economics at Chung-Ang University, analyzed that the economic growth rate, initially expected to be 2.2% this year, could fall to 2.0% due to the rapidly freezing political situation.

Credit Rating and Exchange Rate Management

Fitch has warned that prolonged political instability could exert downward pressure on South Korea's credit rating, further complicating the economic outlook. As the situation unfolds, the market will be closely watching the developments and their potential impact on South Korea's economy and exchange rate.