South Korea’s presidential impeachment vote fails – what’s next?

• Both political parties – the ruling People Power Party, and the opposition Democratic Party are in a stalemate. It is in the interest of the former to stall the impeachment process and for the latter to push the agenda through.
• In the interim, a short to medium term period of political uncertainty in Korea may ensue.
• The implications on the wider financial markets are quite clear. The adverse short-term impact to equities is expected to be short-lived. We do not foresee severe negative impact on USD-denominated Korean credits (fundamentals in this space are healthy and stable), while the Won (KRW) could see some near-term volatility.
• Should growth deteriorate further, supportive policy response – both monetary and fiscal could kick-in, to potentially cushion any shortfall.
• There could be some steepening pressure on the long-end KRW bond yields against a backdrop of Bank of Korea rate cuts and increased debt issuance.

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President Yoon survives impeachment motion – but what lies ahead?

On Dec 5, we put out a market update highlighting the implications following President Yoon Suk Yeol’s declaration and subsequent retraction of martial law. We highlighted then that Korea may enter a short to medium tern period of political uncertainty, but its longer-term fundamentals will likely remain intact, with any spillover effects to the wider Asia ex-Japan region likely to be limited. South Korea enjoys market leadership in many high-tech industries, machinery, transport equipment, consumer products, and IT. This update reinforces the views discussed in the earlier note and examines the political implications from here – in light of President Yoon surviving the impeachment motion against him (due to members of his ruling People Power Party boycotting the vote), and his being banned from leaving the country.

As mentioned in our earlier market update, it may take some time for due process to run its course before a new President comes into office (possibly until Q2 2025). Recent events seem to be playing out to this timeline. It is expected that the current stalemate between the two main parties (the ruling People Power Party and the opposition Democratic party) will persist for the next few months. For the ruling party, holding a snap election now may be counterintuitive – it could cost them the Presidency and possibly lead to the party’s collapse. Holding out for a few months may be a more viable strategy. For the opposition, who only need eight more votes in the National Assembly to proceed with impeachment, it is in their interest to proceed quickly – as their leading Presidential candidate, Lee Jae-myung is being trialled in the courts. Any guilty verdict will disqualify him from the Presidency and stall their momentum.

Given the above circumstances, there may be a period of impasse for a while as both parties are locked in a survival game. In the coming months, the opposition may orchestrate demonstrations to apply public pressure, while the ruling party will prioritise countering public opinion with their countermeasures. This saga is expected to be protracted. Here are some possible scenarios of how the political situation could play out over the next 2-3 months:

• Scenario 1, opposition victory. The opposition secures the eight additional votes needed, and successfully passes the impeachment, allowing Lee Jae-myung to pursue his Presidential bid. (Democrats win).
• Scenario 2, mutual loss. The ruling party continues opposing impeachment, while the President becomes politically paralysed, and the ruling party suffers reputational damage from association with obstruction. (Lose/Lose for both).
• Scenario 3, orderly President Yoon exit. The ruling party negotiates an orderly resignation for the President, appoints a Pime Minister to lead a transitional government for six months, and lays the groundwork for a new election. (People Power Party wins or comes out less damaged politically).

Equity, fixed income, and currency market implications 

Irrespective of which scenario eventually plays out, and although there may be near-term uncertainty, the impact on markets can be discerned. As mentioned in the earlier market update on this event, the negative impact to Korean equities is expected to be short-lived. In the three trading days since the declaration of the martial law, from Dec 4 to 6, KOSPI and KOSDAQ have fallen by 2.9% and 4.3%, respectively¹. In the previous impeachment episode of President Park Geun-hye in 2016, the impeachment drive began in October, and the impeachment motion occurred in December. During this period, the KOSPI declined by about c.10% but subsequently rebounded by more than c.20% over the next 6 months².

In fixed income, we do not foresee severe negative impact to USD denominated Korean issuer credits. Fundamentals in this space are generally healthy and stable. From a macro perspective, Korea’s policy response could turn more supportive, both on the monetary and fiscal front, to potentially cushion any increase in downside growth risk.

Korea’s growth outlook may have recently been revised lower, but this is due to increased headwinds expected from global trade protectionism rising in the years ahead as well as from domestic demand slowdown, rather than from recent political developments. The Bank of Korea (BoK)’s 2025 GDP growth forecast stood at 1.9% and the 2026 forecast is at 1.8%³.

The BoK could continue its current easing cycle should political uncertainty weigh further on domestic demand. Fiscal spending may also pick up to arrest any weakening growth prospects. Elsewhere, increased debt issuance may put some steepening pressure on the long-end Korean Won (KRW) bond yields. On the currency front, there could be some near-term volatility in the KRW.

By and large however, any broad negative market impact from this political situation is expected to be relatively subdued.

 

 

¹ Source: Bloomberg, Dec 2024.

² Source: Bloomberg, Macquarie Research, Dec 2024.

³ Source: Bank of Korea, November 2024 Economic Outlook.

 

 

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