Martial Law Drama: South Korea’s Kospi Index Faces 2.2% Slump Amid Political Turmoil

South Korean President Yoon Suk Yeol declared martial law on Tuesday and markets went haywire.

The Kospi Index fell 2.2% intraday and closed 1.4% lower on Wednesday. Already the worst performing major Asian index this year, the Kospi is down 7% ytd.

Tech giant Samsung Electronics fell 3% before paring losses as the broader market was uncertain. The announcement citing “anti-state forces” and North Korea spooked investors and sent the South Korean won to a 2 year low. Yoon reversed the martial law decision hours later as protests erupted in Seoul but the immediate impact on the market and investor sentiment was clear.

The ‘Korea Discount’ and Economic Fallout

The “Korea discount” which has haunted South Korean stocks for years refers to the fact that they trade at lower valuations than their global peers due to corporate governance and geopolitical concerns. Yoon’s administration had been trying to narrow the discount but analysts say his martial law move may widen it.

“This martial law attempt retards the effort to reduce the Korea risk premium,” said Vishnu Varathan, head of Asia macro research at Mizuho Securities. “Prolonged political uncertainty will hurt growth,” added Hyosung Kwon from Bloomberg Economics.

Protests continued on Wednesday adding to the market chaos. Economists like Rory Green of GlobalData.TS Lombard expect increased volatility in South Korean assets and Asian forex markets as Yoon’s impeachment rumors spook investors.

Stabilization Efforts Provide Some Relief

The South Korean finance ministry and central bank intervened to soothe the markets, offering unlimited liquidity support for stocks, bonds and currency. But market strategist Yeap Jun Rong at IG says political uncertainty will continue to drag prices lower.

Other Asian markets held up, the Nikkei 225 was flat and the CSI300 lost 0.5%. Citi economist Kim Jin-wook says the market impact will be short lived if policies are proactive but Korea’s political instability is a major obstacle to restore investor confidence.

Key Takeaways

• Kospi Slump: Dropped 2.2%, closing 1.4% lower due to martial law turmoil.

• ‘Korea Discount’ Worsens: Efforts to boost valuations face setbacks.

• Government Intervention: Pledged unlimited liquidity to stabilize markets.

As South Korea navigates its latest political crisis, the fallout underscores the challenges of achieving stability in volatile times.