As the impeachment ruling of President Yoon Suk-yeol is delayed and the tariff risk from the U.S. increases, the premium of the Credit Default Swap (CDS) in South Korea is bouncing back. The CDS premium is an indicator of external creditworthiness, rising when the credit risk of the issuing country increases and falling in the opposite case.
According to the International Finance Center on the 30th, the 5-year Korean CDS premium closed at 36.36 basis points (1 bp = 0.01 percentage points) on the New York market on the 27th (local time). After peaking at 40.42 basis points on January 13, the CDS premium showed a downward trend, falling to 28.13 basis points on the 27th of last month, but has been rebounding this month. In March, it has increased daily except for four days on the 12th, 19th, and 24th.
Market analysis suggests that this rise in credit risk is related to the recent political instability. The Constitutional Court's ruling on the impeachment of President Yoon Suk-yeol is taking longer than expected, with escalating conflicts as rallies for and against are held across the country, impacting the domestic economy. Initially, it was anticipated that the Constitutional Court would make the ruling in March, but due to unexpected delays, it has moved into April.
Citigroup noted, "If the political uncertainty persists longer than expected, the credit rating of South Korea could be slightly downgraded, and the stability and effectiveness of economic policies may be undermined." Nomura, a Japanese investment bank, said that "if the political uncertainty continues amid disappointing economic indicators for February, the expectations for further interest rate cuts by the Bank of Korea may be reflected in the financial markets, including government bonds," but also cautioned that "on the other hand, the risk premium for assets in South Korea could also increase."
Additionally, the exposure of the South Korean economy to strong tariff pressures with the inauguration of Donald Trump’s second administration is cited as one of the contributing factors for the CDS premium rebound. In particular, President Trump officially announced on the 26th that he would impose a 25% tariff on foreign vehicles starting on the 2nd of next month, raising concerns about the impact on the domestic economy, where automobiles account for a large proportion of exports to the U.S.
S&P recently projected in a report that the tariff risk from the U.S. would place significant burdens on South Korea's export-oriented economy. As a result, foreign entities have been continuously lowering their forecasts for South Korea's economic growth this year. The British research firm Capital Economics (CE) revised South Korea's growth forecast from 1.0% to 0.9%. Barclays lowered its forecast from 1.6% to 1.4%, HSBC from 1.7% to 1.4%, and S&P from 2.0% to 1.2%.
Foreign investors have recently shown a selling bias toward government bond futures. The 3-year government bond futures have been sold since the 25th, and the 10-year government bond futures have been under net selling since the 18th. JP Morgan stated, "The Constitutional Court has not yet announced the date for the impeachment ruling, and it is currently delayed compared to the past," adding that "the Korean financial market hopes for more clarity on future political schedules and economic stimulus policies."