PROLONGED POLITICAL STANDOFF SHADOWS SOUTH KOREA'S ECONOMY

SEOUL, Jan 13 (Bernama-Xinhua) -- The current political uncertainty in South Korea over President Yoon Suk-yeol's impeachment has shadowed the country's economy, as analysts worry that the standoff will be prolonged and damage investors' confidence, reported Xinhua, citing local media reports.

International credit rating agency Moody's Ratings said the impact of political instability on the South Korean economy so far appears to be limited, but prolonged situations that disrupt economic activity could negatively impact credit, according to local media reports.

Prolonged political fallout could weigh on the government's ability to effectively pass important legislation, including the budget, domestic demand and economic growth, and lower investors' preference for South Korean assets, putting a strain on financial markets, the YTN reported, citing Moody's.

"The martial law and political instability over the impeachment of the president are eroding South Korea's international credibility. While the indicators themselves have not yet reached a worrisome level, if external perceptions of South Korea's economy become fixed in a negative light, this alone could exacerbate the situation," said the Chosun Daily in an editorial.

If the sovereign credit rating is downgraded, both the real economy and the financial sector will be impacted, as the government, state-owned enterprises, and corporations will have to bear higher borrowing costs when seeking loans from abroad, said South Korean newspaper Hankyoreh, adding the current situation over Yoon has plunged South Korea's sovereign credit rating, which has remained at its highest level over the past decade, into a precarious crisis.

Data showed that after the impeachment of Prime Minister Han Duck-soo, who had been serving as acting president following President Yoon's impeachment, the South Korean won weakened to 1,487 per US dollar, marking its lowest level in over 15 years.

The market expected there would be a chance of a further depreciation of the won if the uncertainty continued.

A sharp decline in exchange rates would deal a severe blow to South Korea's economy, which relies heavily on imports of raw materials and energy, economists said, adding a stronger US dollar will increase the cost of raw materials and the burden of dollar-denominated debt, endangering the country's businesses, and rising import prices would also exacerbate the financial strain on vulnerable groups, further worsening the stagnation in consumption.

Meanwhile, according to the country's central bank, the Bank of Korea, the monthly Composite Business Sentiment Index for December jumped 4.5 points lower than November's figure, hitting the lowest level since September 2020.

The central bank last year lowered its growth rate of the country's 2025 forecast from 2.1 per cent to 1.9 per cent and projected growth of 1.8 per cent for 2026. "In other words, the economy is not just facing a temporary downturn but is entering a low-growth trajectory that falls short of its potential growth rate," said the Chosun Daily.

Analysts said that South Korea's economy is experiencing a sharp decline in growth rate due to severely weakened domestic demand and a slowdown in export growth. Amid a weakening economic foundation, the ongoing political standoff will rapidly damage both domestic and foreign investor confidence, as well as consumer sentiment.

Local reports also warned that the prolonged political uncertainty triggered by Yoon's impeachment and the over 4 trillion won budget cut for next year have brought the South Korean government's major economic policies to a standstill.

Experts agree that as the global economic landscape is changing and countries are formulating industrial and trade policies to respond to a potential US trade policy change, it is time for the political circles in the country to unite to avoid falling behind, according to a monthly BusinessKorea.    The Chosun Daily urged that political instability must not be allowed to undermine the economy and people's livelihoods. "The political circle should pool its wisdom and work swiftly to eliminate the uncertainties brought about by this situation."

--BERNAMA-XINHUA