Exchange Rate Shock and Stock Market Plunge Followed by Korea's Credit Rating Shake

With the impeachment motion against Acting President Han Duck-soo passed in the National Assembly on the 27th, the Korean economy has faced an emergency state of 'zero visibility.' The financial and foreign exchange markets, which were gradually stabilizing after the martial law and the impeachment of President Yoon Suk-yeol, have been shaken again by this impeachment. Analysts suggest that the uncertainty surrounding the Korean economy has reached its peak due to the irresponsible 'brinkmanship' of the political parties and the government, making a decline in external credibility inevitable.

Economic Team's Efforts in Vain

Economic experts pointed out that the impeachment of Acting President Han could significantly lower Korea's external credibility. After the December 3 martial law incident, Deputy Prime Minister and Minister of Strategy and Finance Choi Sang-mok and Bank of Korea Governor Lee Chang-yong, the 'economic duo,' focused most on maintaining external credibility. Deputy Prime Minister Choi's meetings with finance ministers of various countries, heads of major international organizations, global credit rating agencies, and financial institution officials, as well as sending urgent letters, were all to request trust and support for the Korean economy. At the macroeconomic and financial issues meeting (F4 meeting) held on the morning of the impeachment motion's passage, Deputy Prime Minister Choi said, "It is crucial to swiftly resolve internal and external anxiety factors politically to stabilize the financial market." However, the so-called 'chicken game' between the political parties and the government over the appointment of constitutional judges is said to have nullified these efforts.

Kim Jeong-sik, an honorary professor of economics at Yonsei University, said, "With even the acting president being impeached, the Korean economy is falling into the trap of politics," and predicted, "As external credibility declines, the won-dollar exchange rate could surpass 1,500 won." Lee Seung-heon, a professor at Soongsil University's Graduate School of Business who served as the deputy governor of the Bank of Korea, said, "With political uncertainty further intensified, it is currently impossible to see an exit to find a solution for the Korean economy."

Amid the global strong dollar phenomenon, the impeachment of Acting President Han has further pushed the won-dollar exchange rate to soar. On this day, the won-dollar exchange rate in the Seoul foreign exchange market (as of 3:30 p.m.) closed at 1,467.50 won, up 2.70 won from the previous trading day. During the day, the exchange rate surged to the 1,486 won range. This is the highest level in 15 years and 9 months since March 2009 during the global financial crisis. Seok Byeong-hoon, a professor of economics at Ewha Womans University, pointed out, "With political uncertainty, external credibility is plummeting, leading to the possibility of foreign investment funds withdrawing, stock prices falling, and exchange rates soaring."

Threats of Serial Impeachment Endanger Credit Rating

Major foreign media also reported the passage of the impeachment motion against Acting President Han as breaking news. AP reported, "The impeachment of Acting President Han could halt high-level diplomacy and intensify political paralysis that shakes the financial markets." The New York Times reported, "(As a result of the impeachment) political uncertainty is causing economic pain, such as a drop in corporate and consumer confidence and a surge in exchange rates."

The opposition Democratic Party of Korea is threatening to impeach Deputy Prime Minister Choi, who has taken over as the next acting president, if he does not immediately appoint constitutional judges. They also announced a 'serial impeachment' of cabinet members. International credit rating agencies such as Moody's and Fitch unanimously pointed out that prolonged political uncertainty in Korea could negatively affect the national credit rating.

A downgrade in the national credit rating means a decline in trust in the Korean economy in the global market. This situation could adversely affect domestic demand and investment again. Companies may delay investment decisions due to the impact of political uncertainty, and consumers may hold back on spending, leading to a prolonged domestic recession. The Korean economy is falling into the so-called 'Korea Discount' trap.

Kang Kyung-min/Park Sang-yong Reporter kkm1026@hankyung.com