Lee Chang-yong: "Martial Law Situation Will Not Greatly Affect National Credibility" [Q&A]

Press Briefing on the Emergency Martial Law Situation

Lee Chang-yong, Governor of the Bank of Korea, recently commented on the emergency martial law situation, stating, "Economic fundamentals and political reasons are separated, so it does not seem that credibility will be significantly affected," and added, "From another perspective, this is an opportunity to show the maturity of Korea's democracy and institutions, so I do not expect a major shock to credibility."

Yonhap News

On the morning of the 5th, Governor Lee visited the Bank of Korea annex press room in Jung-gu, Seoul, and said, "(Since the emergency martial law situation is) negative news, the exchange rate has risen slightly compared to when there was no such situation, and it is inevitable that the stock market is also affected," but he assessed, "Since the martial law was lifted after six hours, unless there is a new shock, I think it will return to the state before the martial law situation."

He also diagnosed that the impact of this martial law situation would be limited compared to past impeachment crises. Governor Lee explained, "Internally, impeachments occurred during the Roh Moo-hyun and Park Geun-hye administrations, and this is the third time," adding, "Looking purely at the two previous experiences, the impact on economic growth rates was limited, and whether we need to change the growth rate due to this event will have to be observed going forward, but at this point, the economic impact seems limited."

- Please evaluate the market trend after the martial law situation. You assessed it as relatively stable compared to expectations. The exchange rate is in the 1,410 won range, and foreign investors are accelerating their exit from the stock market. Can this be interpreted positively?

▲This news is certainly not positive. The biggest concern is to prevent panic in the market caused by this event and to minimize volatility in the short term. Since the announcement was made at night, there were concerns about the foreign exchange market, and preventing panic in the process of connecting to the stock market was the most important short-term task at the F4 meeting. Inevitably, new news caused the exchange rate to surge sharply to 1,444 won in the early morning of the announcement day. After the National Assembly lifted the martial law, it came down again and remained stable until yesterday. Since this is negative news, the exchange rate is slightly higher than when there was no situation, and it is inevitable that stocks are affected, but because the martial law was lifted after six hours, unless there is a new shock, I think it will return to the situation before the martial law. In that process, through the F4 meeting, measures such as liquidity supply and various safety nets were prepared on the economic side, which seems to have contributed to market stabilization. I expect the financial market to return to normal.

- How is the martial law situation viewed overseas? What are the opinions regarding the concern that this incident might lower the country's credibility?

▲The shock seems to be greater overseas. Domestically, people had been observing the political situation, so it was somewhat predictable. However, overseas, an unexpected shock occurred. I will not mention specific names, but I have received contact from many people to clear up misunderstandings. If the martial law had lasted longer, perceptions would have worsened, but since it was lifted after six hours, it seems that Korea's democracy and system itself are not considered problematic. The quick lifting of martial law dispelled many misunderstandings and worries, but concerns about what will happen in the future remain. The credibility issue was also raised in an interview with Bloomberg yesterday. Since the martial law was declared for political reasons, it is necessary to somewhat separate economic movements from political movements. Regarding the credibility question, as S&P also stated that there would be no impact from the martial law, economic growth momentum and economic fundamentals are separated from political reasons, so credibility does not seem to be significantly affected. From another perspective, this is an opportunity to show the maturity of Korea's democracy and institutions, so I do not expect a major shock to credibility.

▲Because there is so much overseas interest, stopping communication would likely amplify misunderstandings. I thought it was necessary to dispel misunderstandings through communication. I am scheduled to have an interview with the Financial Times (FT) this afternoon as well. It is necessary to share our views and stabilize the situation at times like this.

- The temporary Monetary Policy Committee mentioned government bonds. Are these long-term bonds? Is there a possibility this could be seen as quantitative easing? It seems to be a measure taken when responding with the base interest rate is difficult. Does the use of government bonds indicate the Bank of Korea's proactive stance?

▲It has nothing to do with quantitative easing. It means conducting open market operations. If interest rates fluctuate beyond the influence of the base interest rate due to external shocks, the plan is to adjust through open market operations. If panic arises in the market due to this event causing interest rates to spike, sufficient supply will be made to prevent the spike. In reality, such an event did not occur. It is a system set up to take such measures.

- Although the martial law was lifted quickly, political uncertainty is mentioned as a variable due to the high possibility of the impeachment crisis intensifying. What are your thoughts on preemptive interest rate cuts?

▲At this stage, there is no need to change the growth forecast of 2.2% this year and 1.9% next year, or the inflation path, as discussed in the last Monetary Policy Meeting, due to this incident. Since this event was addressed in the short term, its impact on the financial market is limited. However, when reviewing the economic outlook in February with new data, the interest rate path may change conditionally according to the forecast. Since the martial law-related event is short-lived, its impact will be minimal. Factors that could change the forecast path include how U.S. economic policy changes and how export momentum is affected in competition with major countries. Due to high uncertainty, more data is needed to determine the direction.

- Is there a possibility of preemptive interest rate cuts?

▲The forecast must change first, but the current forecast remains unchanged. In communication, there are questions about why the interest rate forecast for three months ahead is not being met and whether preemptive cuts are being made. Preemptive interest rate cuts occur only when the economic outlook changes. There is no reason to change the forecast path now because there is no new information. If new news arrives intermittently, the forecast will change. In the past month, many news items have come in, and if the forecast changes, the three-month interest rate forecast will also change. Previously, third-quarter exports fell more than expected, and the growth forecast was lowered by 0.2 percentage points within a month. The market called it a 'surprise' cut because expectations differed; if the market had known in advance about the 1.9% downgrade, it could have changed accordingly. When discussing lower-than-expected exports, forward guidance was given to allow the market to adjust expectations. The reason it was not done earlier is that it is difficult. Since the export outlook worsened significantly, the market was expected to change. Why do people think interest rates will not be cut? First, many thought the forecast was 2.0%, and second, the Bank of Korea has never cut rates more than twice before. This is based on past patterns and a lack of awareness that new news can change the outlook. Forward guidance has been in place for about two years. Out of ten forward guidances, eight were as expected, and two were surprise cuts. Rather than viewing forward guidance negatively as useless, it is better to communicate well with each other.

- The emergency martial law declaration ended quickly, but the impeachment crisis remains. Some view the market impact as limited, while others disagree. How were growth rates and market impacts during former President Park Geun-hye's impeachment crisis? How does the current situation differ from then? If political instability prolongs, will additional measures be necessary?

▲Internally, impeachments occurred during the Roh Moo-hyun and Park Geun-hye administrations, and this is the third time. The process could be short or long. The reason for not changing the forecast preemptively is, first, uncertainty about whether it will end quickly or last long, and second, based on past experience, even if it lasts long, political and economic processes can be separated. Looking at President Park's case, the short-term impact was less than this time, and the mid-to-long-term impact was also limited. Purely based on two experiences, the impact on economic growth rates was limited. Whether the growth rate needs to be changed due to this event will have to be observed going forward, but at this point, the economic impact seems limited.

This content was produced with the assistance of AI translation services.