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Political chaos strains S. Korean economy

Experts foresee downturn as consumer confidence plunges

By YANG HAN in Hong Kong | China Daily | Updated: 2024-12-25 09:48

Traders monitor stocks at Hana Bank in Seoul on Tuesday. The Korea Composite Stock Price Index closed at 2,440.52, down 0.06 percent from the previous trading day. YONHAP

South Korea's economy faces a challenging year ahead as a result of domestic political turmoil and the expected policy changes from incoming US President-elect Donald Trump.

On Tuesday, the opposition Democratic Party vowed to impeach acting President Han Duck-soo but reversed an earlier plan and decided to wait until later in the week, party officials said.

The party originally set Christmas Eve as the deadline for Han to promulgate two special bills investigating suspended President Yoon Suk-yeol's brief imposition of martial law, as well as graft allegations surrounding his wife, Kim Keon-hee.

Meanwhile, Yoon's lawyer Seok Dong-hyeon said on Tuesday that the president is unlikely to appear for questioning on Wednesday and that he prioritizes the Constitutional Court's impeachment proceedings, with a statement to be issued afterward on his position on the trial.

South Korea's composite consumer sentiment index for this month dropped to 88.4, marking a 12.3-point decline from last month, according to the Bank of Korea, the country's central bank.

It marks the weakest consumer sentiment since 2022. A reading below the threshold of 100 means pessimists outnumber optimists.

During a news briefing on Monday, Deputy Prime Minister and Finance Minister Choi Sang-mok said next year's economic growth is likely to fall below the potential growth rate of 2 percent, Yonhap news agency reported.

In its July forecast, the government projected the economy to grow by 2.2 percent next year. However, citing significant downside risks, Choi said it is inevitable that South Korea will face an economic downturn, though it is not a crisis-level outlook. He highlighted weakened consumer sentiment after Yoon's martial law decree on Dec 3.

Citing projections that next year's growth will fall below 2 percent because of the incoming Trump administration, Shin Se-don, honorary professor of economics at Sookmyung Women's University in Seoul, told China Daily that the growth rate could be even lower as a result of the martial law decree and the impeachment process.

"Currently in South Korea, the biggest risk factor is the impeachment process — whether President Yoon will be successful in retaining his presidency," Shin said. "If he is impeached, the next question is which government will be in place …that is the most serious uncertainty."

If the opposition party takes control, Shin said it is foreseeable that the current economic policy will be reversed. South Korea's policies toward China, the United States and Japan will also change, he added.

"Foreign investors are also very concerned about how the political situation will end up after the impeachment process."

South Korea's currency hit a 15-year low last week, hovering around the 1,450 won level against the dollar.

Its stock market has also felt the ripple effects of the unexpected martial law declaration and the current impeachment process. While the Korea Composite Stock Price Index rose in early trading on Tuesday, it closed at 2,440.52, down 0.06 percent from the previous trading day, amid uncertainty fueled by the Democratic Party's impeachment plans.

Domestic instability

As domestic political instability persists, Yang Jun-sok, an economics professor at the Catholic University of Korea in Seoul, said South Korea might stay in low growth for a year or longer.

Yang emphasized the importance of reforms in addressing both long-term challenges — such as demographics, regulatory barriers and innovation — and short-term political turmoil.

"After the martial law incident … the way that foreign investors look at South Korea has become very sensitive," Yang said, noting that many investors had already begun leaving the country because of its lackluster economy.

Currency volatility is likely to continue until the political turmoil is settled, Yang said, predicting a continued weak won through the second quarter of next year, when tariff policies by the incoming Trump administration become clearer.

Meanwhile, major financial institutions in South Korea have begun discussions to establish emergency management plans in response to the sharp depreciation of the won, The Korea Times reported.

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