South Korean won hits 15-year low – what it means for 'Korea discount'

South Korean president Yoon Suk Yeol has been suspended following an impeachment vote in parliament. The move follows Yoon’s decision to declare martial law earlier this month in a bid to end the grinding political deadlock in Asia’s fourth-biggest economy. Yoon’s attempt to use the army to seize power failed and he now faces allegations of high treason.

Even before that saga, the economy was looking “grim”, says Daisuke Wakabayashi in The New York Times. The local Kospi share index is down 6.5% this year and has been one of the world’s worst performers. The won has underperformed other currencies in Asia, hitting its lowest level since March 2009 on 19 December, after the Federal Reserve announced an interest rate cut, say Jihoon Lee and Yena Park in Reuters. Korea is also highly dependent on exports – it recently started selling more to the US than China for the first time in more than two decades – leaving it vulnerable to Donald Trump’s tariff plans.

There was a “dramatic” market reaction to Yoon’s shenanigans, says Lex in the Financial Times. The won hit a two-year low against the US dollar, equities sold off and sovereign credit default swap premiums spiked.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The coup’s swift failure restored market calm and the Kospi climbed back to where it was on the eve of Yoon’s martial law declaration. But the “stunning abruptness” of the chaos has left investors on edge, and a “drawn-out political struggle” probably lies ahead. Expect Korean stocks to remain under pressure for some time.

What does this mean for South Korea's economy?

Yoon was elected in 2022 promising economic “renewal” and a “deregulatory big bang”, says William Pesek in Barron’s. He has lobbied hard for index compiler MSCI to upgrade his country from emerging-market to developed-market status.

Investors hoped he might end the long-standing “Korea discount”, which sees local shares trade at lower valuations than those in comparable countries. Yet Yoon’s gambit has undone those efforts, making his country resemble “a frontier market hellscape”. The chaos has only vindicated critics who say the Kospi still isn’t ready for “global prime time”.

Of course, political chaos isn’t rare these days even in developed economies. A more prosaic factor causes the Korea discount, says Anshuman Daga for Breakingviews. In Korea, a director’s “fiduciary duty is to the company, rather than to those that own its stock”. The resulting dearth of “shareholder protections” makes Korea an unattractive place to invest.

Yoon had sought to address the problem with his “corporate value-up” policy initiative. Yet so far just 12% of Kospi firms have announced plans to improve shareholder value under the programme.

South Korea has also been the “ultimate exemplar” of prosperity built on US-backed globalisation, says John Authers on Bloomberg. As Pax Americana weakens, once “stable and healthy democracies” from Europe to Asia are coming under strain.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.