A protest rally demanding the impeachment of President Yoon Suk Yeol is held in front of the National Assembly on Dec. 11, 2024. (Image courtesy of Yonhap)
SEOUL, Jan. 20 (Korea Bizwire) — South Korea’s credit default swap (CDS) premium, a key indicator of national credit risk, has started to decline after spiking due to political turbulence. The downturn signals a slight recovery in investor confidence following heightened concerns over political uncertainty.
On January 17, the five-year CDS premium for South Korea closed at 38.16 basis points (bps) in New York, a marginal increase of 0.27 bps from the previous session but a drop from its peak earlier in the month. This marks a notable shift from its recent high of 40.42 bps on January 13, the first time in nine months it exceeded 40 bps.
Political Uncertainty and Market Impact
The surge in South Korea’s CDS premium late last year was driven by escalating political tensions, including a state of emergency declaration and impeachment proceedings against President Yoon Suk-yeol. Moody’s, a global credit rating agency, highlighted the short-term impacts of these events, noting that prolonged political uncertainty could undermine national creditworthiness.
“While strong rule of law and functional institutions have helped stabilize governance, prolonged disruptions to economic activity or weakened consumer and business sentiment could have negative credit implications,” Moody’s stated in its 2025 Asia-Pacific credit outlook report.
The political turmoil has also weighed on the country’s economic outlook. Moody’s projects South Korea’s GDP growth for 2025 at 2.1%, down from 2.3% in 2024, citing potential risks to growth if instability persists.
Signs of Recovery
Despite the turbulence, the CDS premium has declined steadily since its peak, falling for three consecutive days from January 14 to January 16. By January 16, it stood at 37.89 bps, reflecting easing investor concerns.
Similarly, the Korean won has shown signs of stabilization after experiencing significant volatility. The won/dollar exchange rate, which reached a high of 1,472.50 won in late December, eased to 1,458.30 won by January 17.
Analysts attribute this to reduced fears over the impeachment process and subdued pressure from the U.S. dollar after lower-than-expected core inflation figures in December.
Outlook for 2025
Mundan Woo, a researcher at Korea Investment & Securities, noted that while the exchange rate is unlikely to see a rapid decline, its medium- to long-term trajectory remains downward.
“Concerns over the impeachment process have eased slightly, and the strengthening dollar pressure has abated. These factors should support a gradual decline in the exchange rate over the next three to six months,” he said.
As South Korea navigates its political and economic challenges, market indicators such as the CDS premium and currency stability will remain closely watched barometers of recovery and investor confidence.
M. H. Lee (mhlee@koreabizwire.com)
