Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that explores the big ideas in trends moving money across
Speaker 1: the region.
Speaker 2: I'm John Lee in Hong Kong, and I'm Katid Mitariva,
Speaker 2: also in.
Speaker 1: Hong Kong, Kantia. They say a week is a long
Speaker 1: time in politics.
Speaker 2: Yeah, two weeks is even longer.
Speaker 1: Yeah, And so much has happened in South Korea so
Speaker 1: quickly that it's important to note that we're recording this
Speaker 1: episode on Monday afternoon on December sixteenth.
Speaker 2: Yeah, because a lot can happen between now and Thursday,
Speaker 2: when the episode actually airs. So this is what we
Speaker 2: know up until now. President Yunon was impeached Saturday, and
Speaker 2: the Prime Minister has taken over daily duties. The Constitutional
Speaker 2: Court is now reviewing the matter and the first court
Speaker 2: date is set for December twenty seventh.
Speaker 1: And Korea's financial markets took the impeachment news quite positively
Speaker 1: in the morning, but I've noticed that it's pared back
Speaker 1: some of the games. It seems some investors are worried
Speaker 1: about Korea's longer term economic outlook. Discuss creates politics, financial
Speaker 1: markets and the implications for the economy. Is your song
Speaker 1: quan economists for Bloomberg Economics based in Soul. Her song
Speaker 1: Welcome to Age Centric.
Speaker 3: Thank you John, Hello Kacia, I'm really happy to join
Speaker 3: this podcast.
Speaker 1: Your song always in soul for a brief trip. On
Speaker 1: the day that the martial law was announced in Koreer
Speaker 1: and the atmosphere there was one of bewilderment, anger and concern.
Speaker 1: But now we've had the impeachment. What's the mood like
Speaker 1: in soul right now?
Speaker 3: So, especially today, I think the mood in soul is
Speaker 3: kind of normal as usual, but I feel a little
Speaker 3: bit tense in the mood, and especially when we have
Speaker 3: a conversation with our friends or colleagues, we always talk
Speaker 3: about the martial law declaration and the impeachment and what
Speaker 3: we're going to happen.
Speaker 2: Yeah, you said that the mood is still kind of tense.
Speaker 2: So is that because of this sort of you know,
Speaker 2: there is a bit of certainty in that Unit is impeached,
Speaker 2: but now it's at the court level and it could
Speaker 2: trigger an election and all this other stuff. So is
Speaker 2: it kind of the uncertainty of it all?
Speaker 3: I think so. Yeah. So even in president Unit is
Speaker 3: in peach now there is a lot of uncertainty how
Speaker 3: long it will take constitutional court to review the impeachment,
Speaker 3: and then also there's uncertainty about what would be the
Speaker 3: final decision. And then after that, it actually he's impeached,
Speaker 3: then we will have a new presidential election. Then who
Speaker 3: will win the next presidential election and what would be
Speaker 3: the impact for South Kost' economy.
Speaker 2: You've lived in Seoul for your entire life.
Speaker 3: Actually I started living in Seoul since I went to university.
Speaker 2: So you've been in Seoul since kind of university. Has
Speaker 2: anything like this happened before that, as you can remember.
Speaker 3: The last time it happened was twenty sixteen when Dan
Speaker 3: President Bagune was impeached. At that time, the mood was
Speaker 3: a little bit more optimistic and upbeit because the president
Speaker 3: was impeached after a long period of the demonstration of people.
Speaker 3: At that time, as you might see currently from the
Speaker 3: video clip that young people gathered on the street and
Speaker 3: chanting songs, you know, as if it's a concert or
Speaker 3: a festival. At that time, it was similar to but
Speaker 3: there was no such event like declaration of martial law.
Speaker 3: So I think this time the condition in Seoul is
Speaker 3: a little bit more tense and it's more a little
Speaker 3: bit serious.
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Speaker 1: if I could take a step back, can you explain
Speaker 1: to the listener why the initial martial law hit a
Speaker 1: nerve in Korea? Like you know, I'm ethnically Korean. I
Speaker 1: don't remember the military dictatorship of Korea, but there is
Speaker 1: an older generation that really do. Can you explain to
Speaker 1: the listener?
Speaker 3: So before the very recent martial law declaration? Last time
Speaker 3: the martial law declaration was in nineteen seventy nine when
Speaker 3: the President Bak Junkie was assassinated and after that, the
Speaker 3: General John du One investigated President bux assassination and during
Speaker 3: the investigation, General John Juhan declared martial law and then
Speaker 3: he took the power and then he became the president.
Speaker 2: I was noticing that from the coverage here in Hong
Speaker 2: Kong in Seoul where you had after the impeachment was announced,
Speaker 2: there were just people crying in the streets and hugging
Speaker 2: each other, and it seemed to really kind of stir
Speaker 2: for a lot of people that historic moment as well,
Speaker 2: because that was a very difficult time at a very
Speaker 2: different time in South Korean.
Speaker 3: Yeah, so it was more than forty years back when
Speaker 3: the declarature martial law was imposed. It means the Korean
Speaker 3: society going back to like almost four decades ago, right,
Speaker 3: So I think it might shock a lot of people
Speaker 3: and then like stirred their feeling and mood.
Speaker 1: Yeah, and this generation, I'm not used to this type
Speaker 1: of political environment. And I'll be the first to admit
Speaker 1: I actually looked up on Wikipedia what a marshal law entails.
Speaker 2: I think you and everyone else though, Yeah, is there
Speaker 2: a curfew?
Speaker 1: Can I go out? Can I leave the country? It
Speaker 1: was very frightening.
Speaker 3: Exactly the same here. In fact, I have to write
Speaker 3: a react on the declaration martial law. When I publish
Speaker 3: my react, I need to decide, you know, the react
Speaker 3: should be published under my name or not, And then
Speaker 3: I chose to publish it anonymously under the name of
Speaker 3: the Bloomberg News, because if the martial law is actually imposed,
Speaker 3: I don't know what will happened to me, right.
Speaker 2: Yeah, because the media would lose freedoms as well. There
Speaker 2: are a lot of kind of elements of marshal law,
Speaker 2: but one of them is that the media and free
Speaker 2: speech is suspended.
Speaker 3: Right, So one of the announcements by the decree of
Speaker 3: martial law was that any activity of politics and the
Speaker 3: media is suspended. And at the end of the announcement
Speaker 3: present you said that if the residents and interns will
Speaker 3: not return to the hospital, there will be punished seriously.
Speaker 3: So other people might take that quite you know, seriously.
Speaker 1: Well, thankfully for us. You know, the marshal law only
Speaker 1: lasted for six hours's martial art history. Now the president
Speaker 1: has been impeached, what do you think is the most
Speaker 1: likely outcome.
Speaker 3: I think he is most likely to be actually impeached,
Speaker 3: but he's now impeached by the National Assembly, and I
Speaker 3: think the Transitional Court will determine that emvestment legitimate, so
Speaker 3: I think he's more likely to be removed from his office.
Speaker 3: But the question is when the decision will be made.
Speaker 1: So it could be matter of a couple of months
Speaker 1: to six months do you think, or.
Speaker 3: Up to six months, But well, some people expect that
Speaker 3: this time the wrongdoing of president is quite obvious, so
Speaker 3: it might take shorter. But no, actually, right, there's job So.
Speaker 1: If the Constitutional court upholds the impeachment, then there'll be
Speaker 1: a snap presidential election.
Speaker 3: Right, the snap presidentship election will be within two months.
Speaker 3: Let's say if the Constitutional Court uphold the impitchment move
Speaker 3: in April, then what will have a snap election in June?
Speaker 2: Yeah, so essentially right now we're waiting John, as you mentioned,
Speaker 2: rain for the Constitutional Court to rule. Once they do rule,
Speaker 2: they might uphold what lawmakers just voted on. If they do,
Speaker 2: there'll be a snap election. If there's a snap election,
Speaker 2: it looks like, according to polls, the most likely candidate
Speaker 2: is the leader of the opposition. Now we were just
Speaker 2: chatting before this episode, John and I, and you know,
Speaker 2: the leader of the opposition has been front and center
Speaker 2: and all this, but he's also a bit of a risk,
Speaker 2: right for markets, but also for the economy. More broadly,
Speaker 2: there's these two main political parties in South Korean. One
Speaker 2: of them is a bit more pro US and one
Speaker 2: of them is a bit more pro China and whereas
Speaker 2: you and it was a bit more pro us. You
Speaker 2: have this candidate or could be a candidate who's a
Speaker 2: bit more leaning towards China. So I wonder if you
Speaker 2: could unpack that just a bit, like as an economist,
Speaker 2: you're looking at first of all, all of this uncertainty
Speaker 2: and then with the certainty there's also risk. So how
Speaker 2: do you look at that.
Speaker 3: It's very difficult to assess the risks because, as you mentioned,
Speaker 3: the leader of the Democratic Party, jig Fasis is your
Speaker 3: own legal risks, right. So that's why how soon the
Speaker 3: Constitution of cult ruling will be made is very important.
Speaker 3: So if constitutional court ruling is delayed, then we might
Speaker 3: see the court ruling about Jem Yong's case, then it
Speaker 3: might make him less eligible for a candidate or questionident.
Speaker 1: Yeah, and just to recap for the listeners, you're mentioning
Speaker 1: that the opposition party leader E JM Yong, he received
Speaker 1: a suspended jail sentence for breaking electoral laws, so he's
Speaker 1: got quite a lot of skeletons in the closet as well.
Speaker 1: It sounds almost very parallel to what happened in the
Speaker 1: US elections. But back to Katia's point. You know, President
Speaker 1: Yun was quite well known for being pro us. I
Speaker 1: remember he visited Washington, d C. And he actually did
Speaker 1: a rendition of American Pie to Joe Biden, so he
Speaker 1: was very pro us. If the opposition party gets into office, now,
Speaker 1: I know we're making a lot of assumptions, but that's
Speaker 1: less US focused and much more consideraty towards North Korea
Speaker 1: and China. This could also bring about some more geopolitical risks.
Speaker 3: Know, at this point, what I understand is, as you
Speaker 3: mentioned that President Yun is more for US and the
Speaker 3: opposition leader is Jam Young is more for China and
Speaker 3: pro North Korea. So if he actually elected as hasan
Speaker 3: is total assumption, right, and then I think we might
Speaker 3: have some sort of tension between the US and Korea
Speaker 3: and also between Japan and Korea. At the same time,
Speaker 3: it could be possible that South Korean government will have
Speaker 3: more friendly relationship with North Korea. During the UNI's administration reign,
Speaker 3: it was rejected by President Yun. Right, North Korea is
Speaker 3: sort of enemy as in the Cold War ends, but
Speaker 3: Risemion has a different perspective. So in terms of geopolitical risks,
Speaker 3: we have more pressure and at the same time less
Speaker 3: pressure from the North Korea.
Speaker 2: Well, speaking of the US, President elect Trump becomes President
Speaker 2: Trump on January twentieth, and we know that he is
Speaker 2: keen on issuing a lot of tariffs. And South Korea
Speaker 2: is a very trade dependent country. So how are you
Speaker 2: looking what's your base case for the economy next year
Speaker 2: in twenty twenty five, because this is something that markets
Speaker 2: are as you said, John and the opening, I mean,
Speaker 2: this is what markets are looking at.
Speaker 3: So South Korea is export dependent economy, right, and then
Speaker 3: large share of exports directly goes to the US, and
Speaker 3: another large share of experts goes to China to be
Speaker 3: manufactured to be expert to the US. So probably the
Speaker 3: great share of Korea's product final destination is the US.
Speaker 3: And then present elect Trump try to have new trade
Speaker 3: relationship with all of the country China, even South Korea.
Speaker 3: So his policies would have a from a perspective, quite
Speaker 3: significant downside risk to South Korea's economy. But it really
Speaker 3: depends on how he will initiate his tetle power losses.
Speaker 3: According to our Bloomboo Economics baseline scenario, the Trump administration
Speaker 3: will start trade war with China on the second half
Speaker 3: of next year and then the rest of the world
Speaker 3: in twenty twenty six. So in that case, the burden
Speaker 3: from the Trump administration trade policy would hit the economy,
Speaker 3: particularly in twenty twenty six, not twenty twenty five.
Speaker 2: So South Korea kind of off the hook initially.
Speaker 3: Right right, That is our Bloomberg Economics baseline scenario. But
Speaker 3: in addition to that, I think South Korea have its
Speaker 3: own vulotability because South Korea experts rely on the US demand.
Speaker 3: At the same time, South Korea is enjoying a huge
Speaker 3: amount of trade SURPERUS with the US, which will make
Speaker 3: a present Electron unhappy.
Speaker 1: Of the target of Trump.
Speaker 3: Yeah, so that he will try to crack that trade
Speaker 3: relationship through a renegotiation of Korea US Free Trade agreement
Speaker 3: or you know, urging Korean government to import more US
Speaker 3: goods including energy or arms.
Speaker 2: When does it start eating away at GDP? You know,
Speaker 2: the political uncertainty. First of all, do you see the
Speaker 2: martial law in the past two weeks and the uncertainty
Speaker 2: hitting GDP at any point? And also all this US
Speaker 2: tariff uncertainty as well, Does that hit South Korea's economy
Speaker 2: at any point.
Speaker 3: I think it is already happening, already hitting the South
Speaker 3: krist economy because right after the martial law, people sentiments
Speaker 3: started to deteriorate. And also during this time we tend
Speaker 3: to have the e N gathering for some gap style
Speaker 3: and soldio. But nowadays I hold from news that many
Speaker 3: people canceder gathering, you know, so yeah.
Speaker 2: Some gap style is pork Bobby Pool, Yeah, for international listeners.
Speaker 3: So the impact is already happening. And then another wordy
Speaker 3: I have is that due to the martial law and impeachment,
Speaker 3: I think the government lasts some momentum to spend fiscal
Speaker 3: expenditure in December, so that we might see decline in
Speaker 3: government expenditure in the fourth quarter. So that will probably
Speaker 3: reduce growth for twenty twenty four and then its impact
Speaker 3: will continue next year.
Speaker 1: And also before you joined Bloomberg Economics, you were actually
Speaker 1: working at the Bank of Korea and I wanted to touch
Speaker 1: on monetary policy. Career is one is really weak? What's
Speaker 1: the monetary policy going forward? Like the Bank of Korea
Speaker 1: seemed to be on the path of cutting rates, but
Speaker 1: now you've got this weak economy. You've got weak growth
Speaker 1: on one side, weak effects on the other what's the
Speaker 1: path going forward.
Speaker 3: I think Bank of Korea's monetary policy direction is quite
Speaker 3: clear now. As you mentioned, John, further cutting rates is
Speaker 3: on the horizon, and the only question is how fast
Speaker 3: it my move and then how far it will cut
Speaker 3: interest rates. So as I Lady mentioned that the discent
Speaker 3: political crisis, Lady started eating GDP this month, and then
Speaker 3: the households and business sentiments is deteriorating. So I think
Speaker 3: the BOK will start cutting from January after it delivered
Speaker 3: back to back interest records in November, after it started
Speaker 3: easing monetary policy in October.
Speaker 1: So they won't be I'd all be worried about trying
Speaker 1: to protect the ethics.
Speaker 3: Right, So yeah, fact is a tricky issue. Bank of
Speaker 3: Korea should pay attention to pleasures under one. But I
Speaker 3: think at this point the more risk is the downside
Speaker 3: risk to growth because in some sense, the weak one
Speaker 3: is driven by a strong US dollar. So I think
Speaker 3: even if we didn't have this political instability, the market
Speaker 3: expected the one would have depreciation pressure due to the
Speaker 3: well incoming Trump administration trade policy and then Chinese willance
Speaker 3: depreciation pressure, so market expected that Korean ie would have
Speaker 3: depreciation pressure from the week Wian because one is considered
Speaker 3: as a prox currency to Chinese van. So the bottom
Speaker 3: line is that the one is already under pressure, but
Speaker 3: now we have new shock to South Korea's real economy,
Speaker 3: and then be Okay should take care of this is
Speaker 3: downside risk to real economy and then for the FX
Speaker 3: market it will do some smoothing operation and then possibly
Speaker 3: to just its pace up rate cutting.
Speaker 2: Is there a sense that like the balance there between
Speaker 2: the currency and the risk of Trump? In other words,
Speaker 2: a Trump administration would impose these protectionist policies that could
Speaker 2: be bad for exports and trade, bad for South Korea,
Speaker 2: but also with a weaker currency, it could make the
Speaker 2: country a bit more competitive against peers, but specifically against China.
Speaker 2: So what's the balance there? Is that good or bad?
Speaker 3: So, as you mentioned Katya the wikiwe would give some
Speaker 3: competitive edge to Korean exporters. But the problem is that
Speaker 3: if the depreciation occurs rapidly, it might lead to financial instability.
Speaker 3: So the b Okay or probably most of the central bank,
Speaker 3: what is that the speed up depreciation or sometimes they
Speaker 3: call it the volatility in the ex market. So as
Speaker 3: long as the depreciation in the one occurs in an
Speaker 3: orderly manner or you know, in a measured way, then
Speaker 3: be okay would allow the depreciation in the one. But
Speaker 3: if that happens steeply, were sharply, then be okay would
Speaker 3: interven the market or even just the speed up mantorly easing.
Speaker 1: And here, Song, some of the export beneficiaries that you
Speaker 1: maybe have alluded to and for the listener would be
Speaker 1: some of the major semiconductor makers like Samsung Electronics, ESK, Heinex,
Speaker 1: and of course like the auto Giant which is and
Speaker 1: also which owns motives.
Speaker 2: The big guys.
Speaker 1: Yeah, a Song, I was thinking this couldn't have happened
Speaker 1: at a worse time for career. Even before the martial
Speaker 1: law news, Career's equity market was the worse performing in
Speaker 1: the Asia Pacific region. I think today I looked at
Speaker 1: the Bloomberg screen. In local currency terms, it's down six
Speaker 1: percent year to day. US dollar terms is down sixteen percent,
Speaker 1: and we mentioned the effects. It's also got the weakest
Speaker 1: currency in Asia. On the flip side, if you look
Speaker 1: at what global investors have done, they sold a bit
Speaker 1: of Korean equities, but as you mentioned in your report,
Speaker 1: they've been buying some local government bonds. So does that
Speaker 1: show you that maybe global investors are not heading for
Speaker 1: the door and they're still somewhat sticking to Korea.
Speaker 3: I think so, and I hope so. So. As you
Speaker 3: mentioned that the forteen investors or global investors continue to
Speaker 3: buy Korean government bonds, there are two things behind that movement.
Speaker 3: One is the expectation that rates will go down further
Speaker 3: because the economy is just slowing down and slowing down
Speaker 3: more rapidly now. And the other day is the Korea
Speaker 3: is likely to join the WIKBI next year, which could
Speaker 3: increase the investor base of Korea treasury market, which will
Speaker 3: also increase the government bond right, So I think the
Speaker 3: global investors think that so far, even at this point,
Speaker 3: it is a good idea to purchase more Korean government bond.
Speaker 3: But for the stone market, there was an analysis that
Speaker 3: actually foreign investors wasn't selling Korean stone market, but actually
Speaker 3: they were selling Korean semiconductor industry. Except for semiconductor industry,
Speaker 3: foreign investors continued to purchase Korean stocks. So I think
Speaker 3: it is also good to separate what they are selling
Speaker 3: or what they are purchasing.
Speaker 1: And we talked about global investors. But what about local investors?
Speaker 1: What are they doing in Korea?
Speaker 3: Spooked by the news, the local investors, especially the retail investors,
Speaker 3: now more interested in investing in the US market than
Speaker 3: in the Korean styne market.
Speaker 2: I think it's everyone right now.
Speaker 3: Yeah, because I saw that this year, the year today
Speaker 3: return of the COSP was negative six percent. It was
Speaker 3: declining around six percent compared to the US one nastad
Speaker 3: around thirty percent increase return or the SM five hundred
Speaker 3: around twenty seven or six percent. So Korean retail investors
Speaker 3: are not happy with the expected return in the koreanstyn market,
Speaker 3: and they are moving their money into the US market.
Speaker 1: Yeah, and that's quite interesting because when I was in Seoul,
Speaker 1: I heard there's a new mantra for retail investors in
Speaker 1: terms of asset allocation that like to put eighty percent
Speaker 1: of their money to the S and P five hundred
Speaker 1: and twenty percent of bitcoin twenty percent bitcoin.
Speaker 2: Yeah, that's a whole that's a whole other episode. Well,
Speaker 2: thanks for joining us today. Your son is a great conversation.
Speaker 3: Thanks for having me.
Speaker 2: I'm Katjadmitrieva in Hong Kong. You can follow me at
Speaker 2: at Katia Dmi on x or on LinkedIn.
Speaker 1: And I'm John Lee also in Hong Kong. You can
Speaker 1: follow me on LinkedIn by searching John Lee at Bloomberg.
Speaker 1: And this will also be our last podcast for twenty
Speaker 1: twenty four. We'll be taking a two week break and
Speaker 1: we'll be back in early January with a new lineup
Speaker 1: of great speakers. So thank you everyone.
Speaker 2: And the podcast was produced by Clara Chen. You can
Speaker 2: find her on the terminal or on LinkedIn. You can
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Speaker 2: you listen. You can also find us at b I
Speaker 2: Podcast on the Bloomberg Terminal. See you in the new year.