The emergency martial law declaration by President Yoon Suk Yeol and the impeachment political crisis have led to a cooling of consumer sentiment that is more severe than during the political turmoil surrounding former President Park Geun-hye's administration eight years ago. With external factors looming over the new government in the U.S. and rising concerns about domestic instability caused by consumption slowdown and construction industry recession, political anxiety has rapidly frozen consumer sentiment.
According to the Korea Development Institute (KDI) on the 8th, following President Yoon Suk Yeol's declaration of emergency martial law on the 3rd of last month, the sentiment of households and corporations has rapidly deteriorated. Last month's consumer sentiment index was 88.4, a drop of 12.3 points from the previous month (100.7). The consumer sentiment index is a composite measure calculated from six major indexes, including household income expectations and consumption spending expectations. A reading below 100 indicates a negative sentiment, while a higher number signifies a more positive outlook.
Last year's average monthly consumer sentiment index remained between 98 and 103, but fell below 90 in December. The decline of 12.3 points compared to the previous month is the largest decrease seen in 57 months since March 2020, when the COVID-19 pandemic broke out, which saw a drop of 18.3 points.
During the political turmoil surrounding President Park Geun-hye's administration in 2016, the consumer sentiment index also worsened. However, at that time, as the events prolonged, the consumer sentiment index deteriorated gradually. It dropped about 5 points in the first month alone and decreased by a total of 9.4 points over three months.
KDI analyzed that "President Yoon's emergency martial law has come as a greater shock to consumers than former President Park's political scandal."
The Business Survey Index (BSI) is also in a worse situation compared to 2016. The general industry BSI, which had been above 70 until September of last year, has now dropped to 64.
In contrast, during the political crisis caused by former President Park's scandal, the BSI showed an upward trend. The BSI, which was 71 in October 2016, rose to 80 by April 2017.
Regarding this, Deputy Minister Jeong Gyu-cheol of KDI said, "In 2016, construction investment increased by more than 10%, and exports were also on the rise. For this reason, corporations anticipated that the economy would improve in the future," adding, "This time, however, construction investment is plummeting, and the future of exports is uncertain."
While sentiment indicators are fluctuating, financial market indicators show relatively stable performance.
A key indicator of national financial market stability is the credit default swap (CDS) premium, which reflects the government's default risk. During the political turmoil surrounding President Park's impeachment in 2016-2017, Korea's CDS premium increased by 14 basis points, whereas it has only increased by 4 basis points this time. This suggests that investors are not viewing Korea's credit risk as seriously as before.
The exchange rate initially showed some volatility during the crisis but has stabilized recently. From December of last year to now, the exchange rate increased by about 5% from around 1,400 won to the 1,480 won range, and has recently adjusted to about 1,450 won. In contrast, during 2016-2017, the won/dollar exchange rate increased by about 7% from the mid-1,100 won range to around 1,200 won.
The relative stability of the financial market is attributed to the improved external soundness of the Korean economy compared to the past. As of December last year, South Korea's foreign exchange reserves stood at $415.6 billion, an increase of more than $40 billion compared to October 2016 ($375.2 billion). The net external financial assets have also increased to $977.8 billion, more than three times the $281.1 billion in the fourth quarter of 2016, reaching 50% of GDP.
Deputy Minister Jeong explained, "Foreign investors seem to feel that the Korean financial market is more stable now compared to 2016."