[Initial Insight] Time Is Crucial for Resolving the Martial Law Situation

Domestic Stock Market Loses 34 Trillion Won in 9 Days
Interest Rates and Credit Spreads Still Stable
Need Quick Stabilization to Prevent Further Deterioration

It has been nine days since the declaration of martial law. During this period, the market capitalization of the KOSPI index dropped from 2,010 trillion won to 1,979 trillion won, a loss of about 31 trillion won, while the KOSDAQ fell from 337 trillion won to 334 trillion won, losing 3 trillion won. The corporate value of domestic listed companies, totaling 34 trillion won, vanished into thin air like smoke following the martial law incident. The won-dollar exchange rate also surged sharply from the high 1,300 won range to the mid-1,400 won range. The rising exchange rate leads to higher import prices, placing a burden on the economy. The efforts by the Bank of Korea to control inflation could be undone in an instant. The domestic stock valuation of the National Pension Service, which manages the retirement funds of the people, has fallen to its lowest level since the 2020s.

The somewhat fortunate aspect is that interest rates, which reflect the country's economic strength, have not yet increased volatility. The government bond yields have remained relatively stable around the mid-2% range, aligned with the Bank of Korea’s interest rate cut policy. Corporate bond credit spreads, which indicate companies’ credit risk, have also shown stability. The three major global credit rating agencies?Standard & Poor’s (S&P), Moody’s, and Fitch?have warned of political instability but maintain that the temporary political risks will have a limited impact on South Korea’s sovereign credit rating. South Korea’s credit default swap (CDS) premium, reflecting national creditworthiness, has not surged and has remained steady at around +25 basis points.

Compared to the psychological shock of the military attempting to seize the National Assembly under martial law, the financial market’s current state can be considered somewhat reassuring. Recently, foreign investors have been buying high-quality companies that experienced sharp short-term declines, leading to a partial recovery in domestic stock market liquidity. This indicates that both domestic and international investors trust the resilience of Korean democracy and its ability to recover in times of crisis. The fact that martial law was lifted within six hours through the power of citizens and the National Assembly, and that citizens physically blocked the military and armored vehicles, was widely reported by foreign media, demonstrating to the world the strong will of the Korean people not to return to the days of dictatorship.

The greatest risk in the current situation is the prolonged uncertainty. If the situation, which seemed poised for a quick recovery, fails to find a resolution due to political division, the temporary financial shock could spread to the real economy, causing an economic ripple effect. Global investors are reducing their investments in Korean stocks and bonds, and rising market interest rates could worsen issues related to real estate project financing (PF) and household debt. As market instability drives interest rates up, it becomes harder for companies?the backbone of economic strength?to secure funding. With 27 trillion won in corporate bonds maturing in the first quarter of next year alone, there are concerns about whether sufficient funds can be raised. If macroeconomic stability is shaken, global credit rating agencies that had expected a swift recovery in Korea may ultimately downgrade the country’s sovereign credit rating. We may witness the gradual collapse of the economic tower painstakingly built over decades.

To quell financial and macroeconomic instability, political unrest must be stabilized promptly. The time taken to normalize this abnormal situation will determine the total economic cost of the martial law incident. The longer it takes, the exponentially greater the cost to the national economy will be. Neither the ruling nor opposition parties should delay by calculating political gains. Only a swift stabilization of the political situation, proceeding according to laws and procedures, can restore the resilience of our fractured economy. Time is running out.

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