S Korea's central bank slashes forecasts over political crisis

Seoul: South Korea's central bank on Monday slashed its 2025 growth forecast because of the political crisis triggered by President Yoon Suk Yeol's declaration of martial law last month.

The move came as the government unveiled a $250 billion support package for exporters amid worries of possible tariffs by Donald Trump as he prepares to return to the White House.

Yoon briefly suspended civilian rule on December 3, sending soldiers to parliament, but lawmakers voted the measure down and later impeached the president, who is now being held for a criminal probe on insurrection charges.

He initially resisted arrest and has refused to cooperate with investigators. When his detention was extended, his die-hard supporters attacked a court building on Sunday.

"The unexpected declaration of martial law in early December, coupled with the ongoing political turmoil and the Jeju Air passenger plane disaster, significantly dampened economic sentiment," the Bank of Korea (BOK) said in a statement.

A Jeju Air Boeing 737-800 crashed on December 29 in southwestern Muan airport, killing 179 people in the worst ever aviation disaster on South Korean soil.

The political turmoil and crash "led to contractions in domestic consumption and construction investment, likely causing the fourth-quarter growth rate to fall well below the November projection", the bank said.

"Consumption, which had shown improvement in the third quarter, appeared to weaken again in the fourth quarter," it said.

As a result, the bank's Monetary Policy Committee revised down its estimate for the last quarter of 2024, from 2.2 percent to a range of 2.0-2.1 percent.

It had projected 1.9 percent growth for 2025, but "the forecast has been revised downward to 1.6-1.7 percent", it said.

"This adjustment is primarily attributed to the impact of political uncertainty triggered by the declaration of martial law last December, which has dampened economic sentiment," it said.

"This is estimated to reduce this year's growth rate by approximately 0.2 percentage points, particularly affecting domestic consumption and other areas of domestic demand," it added.

'Critical turning point'

HSBC economist Jin Choi. said: "It is rare for the bank to release its interim growth forecast... it reflects the BOK's ongoing efforts to provide support for a normal functioning by the government."

At a meeting with state think tanks, acting President Choi Sang-mok said that with the new US administration, South Korea is at a "critical turning point" where "uncertainty based on campaign promises" transitions into "practical policy risks".

State think tanks expressed their concern over the inauguration of the new US administration, citing a "sluggish domestic recovery in sectors like construction, partly due to weakened economic sentiment stemming from domestic political situations".

Choi also emphasised that the way South Korea "responds during the early days of the new US administration... will serve as a golden time that will have a significant impact on the future of the country's economy."

The government announced its huge exporter support package in preparation for possible tariffs by Trump, who warned on his election campaign trail last year that he would revive his hardball trade policy when he takes office.

"External uncertainties, such as the inauguration of the new US administration, pose concerns about potential adverse effects on the export front for businesses," said Kim Dong-joon, deputy director of the Ministry of Finance support division.

In response, "the government plans to provide export financing on an unprecedented scale of 360 trillion won ($248.1 billion) this year", the ministry said in a statement.

Following the short-lived period of martial law consumer sentiment fell to its lowest since the Covid-19 pandemic.

Even after Yoon was impeached, the won plunged against the dollar and the country's unemployment rate recently spiked to the highest since 2021.