South Korea has found itself in the global spotlight after an extraordinary series of political events this week, raising concerns about the future of Asia’s fourth-largest economy. President Yoon Suk Yeol’s sudden announcement of emergency martial law on Tuesday evening, followed by a swift reversal just hours later, has injected new uncertainty into the country’s economic and political landscape. Analysts warn that the fallout could worsen South Korea’s already challenging economic outlook, but some believe the turbulence may pave the way for brighter prospects if deeper instability can be avoided.
President Yoon initially justified the martial law declaration as a necessary step to protect South Korea from “communist forces” in North Korea and to address so-called “anti-state forces.” However, his decision to rescind the order came after nearly 200 lawmakers convened in the National Assembly to unanimously block the move. The rapid backtracking has triggered political upheaval in the country, a critical player in global supply chains and a close ally of the United States.
The political drama’s immediate impact was felt in financial markets. U.S.-listed Korean stocks tumbled following Yoon’s announcement, while South Korea’s won dropped to a two-year low against the U.S. dollar. Although the currency regained most of its losses by Wednesday, the broader market remains volatile.
Economic concerns amid political uncertainty
South Korea’s Kospi index closed 1.44% lower on Wednesday, trimming earlier losses of more than 2% after opposition lawmakers launched impeachment proceedings against Yoon. The index’s decline reflected growing worries about the political uncertainty’s impact on an economy already grappling with external and internal pressures.
Kim Byung-hwan, South Korea’s vice minister of Economy and Finance, sought to reassure markets early Wednesday, announcing that the government was prepared to deploy 10 trillion won (approximately $7.06 billion) to stabilize the stock market “at any time.”
Despite the government’s intervention, the uncertainty surrounding Yoon’s presidency continues to weigh on investor sentiment. Deutsche Bank strategists noted in a research report that while the immediate crisis has calmed, South Korea’s central role in global supply chains makes its political and economic developments crucial to monitor.
Structural challenges for Korean markets
Jonathan Garner, chief equity strategist for Asia and emerging markets at Morgan Stanley, highlighted broader structural issues facing South Korea’s economy. Speaking on CNBC’s Street Signs Asia, Garner explained that Morgan Stanley remains underweight on Korean stocks, given the country’s vulnerability to global economic headwinds.
“Korea is one of the most trade-dependent markets we cover, and it faces significant risks from tariff and non-tariff barriers globally,” Garner said. “Additionally, the semiconductor cycle is starting to weaken, and the global automotive sector is under pressure—both of which weigh heavily on the Korean market.”
Garner also pointed out that even before the recent political turmoil, Morgan Stanley’s economists had forecast South Korea’s economic growth to fall below 2% in 2025, marking one of the steepest slowdowns globally.
Major South Korean companies have already felt the ripple effects. Technology giant Samsung, the country’s largest corporation, saw its shares fall by 1% on Wednesday. Battery maker LG Energy Solution and automaker Hyundai Motor recorded losses of 2.8% and 2.4%, respectively, reflecting broader concerns about the country’s trade-dependent industries.
Currency volatility adds to investor worries
The South Korean won, one of Asia’s most closely watched currencies, has also experienced heightened volatility. It last traded at 1,414.22 against the U.S. dollar, recovering from Tuesday’s low of 1,444.93—the weakest level since October 2022, according to LSEG data.
Rory Green, chief China economist and head of Asia research at TS Lombard, noted that the uncertainty surrounding Yoon’s presidency is likely to keep pressure on Korean assets, particularly Asian currencies. “The negative price action and volatility are set to continue,” Green wrote in a research note.
Criticism of Yoon’s leadership
Economists have criticized Yoon’s attempt to impose martial law, describing it as a poorly timed and politically damaging move. Trinh Nguyen, senior economist at Natixis, called it a “very, very bad decision” and a significant misstep for South Korea during a critical period.
“Martial law hasn’t been declared since 1979, and for good reason—it’s deeply negative for the country’s image,” Nguyen said on CNBC’s Squawk Box Asia. “While the reversal is positive, the entire episode has introduced significant political uncertainty, particularly regarding President Yoon’s future.”
Nguyen pointed out that South Korea’s economy is already under strain, with declining October exports, a weakening chip cycle, and subdued domestic demand. “This is not a good time for South Korea. We need strong governance and a fiscal strategy that addresses both short-term and long-term challenges, including the pressures from China and tariffs,” she added.
Potential for recovery
Despite the current turmoil, some analysts see reasons for cautious optimism. Thomas Mathews, head of markets for Asia Pacific at Capital Economics, noted that Yoon’s impeachment or resignation could ultimately stabilize the political environment and improve investor sentiment.
“Presidential impeachments are not unprecedented in South Korea. The country’s markets, at least, performed relatively well during the last impeachment in 2016-2017,” Mathews wrote in a research note. He added that the political system’s ability to check executive power could provide reassurance to investors.
Mathews also highlighted the resilience of South Korea’s technology sector, which is well-positioned to benefit from the growing global demand for artificial intelligence (AI) and other emerging technologies. “If investor sentiment toward South Korea were to improve, we believe it could do so sharply, given the strength of major Korean tech companies,” he said.
Navigating an uncertain future
For now, uncertainty remains the dominant theme in South Korea’s political and economic outlook. The impeachment proceedings against Yoon are likely to dominate headlines in the coming weeks, and their outcome will play a crucial role in shaping the country’s trajectory.
At the same time, South Korea faces broader economic challenges, including declining global demand for semiconductors, stagnating domestic consumption, and rising geopolitical tensions. The country’s ability to navigate these hurdles will depend on effective leadership and coordinated fiscal and monetary policies.
While the political drama has shaken investor confidence, analysts suggest that South Korea’s long-term prospects remain intact. The country’s robust technology sector, strategic position in global supply chains, and institutional strength could help it weather the storm if political stability is restored. However, as Mathews noted, “there’s likely more water to pass under the bridge before we see meaningful recovery in sentiment.”
For now, South Korea’s markets and its economy remain in a delicate balance, with investors closely watching every development.
