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Posted by on Apr 5, 2017 in Korea Investment Management, Market Insight

Implications on Korean Economy after the Impeachment

Implications on Korean Economy after the Impeachment

By Korea Investment Management, sub-advisor of the AdvisorShares KIM Korea Equity ETF (NYSE Arca: KOR)

On March 10th, the Korean Constitutional Court (CC) accepted the motion to impeach President Park Geun-hye, with all eight working judges voting for impeachment. The conclusion came 92 days after the National Assembly passed the impeachment motion overwhelmingly on December 9, 2016. The constitution requires a new presidential election to be held within 60 days following the CC’s ruling, and the government finalized the date of the election to be held on May 9th. After primary elections of political parties in March and April, presidential candidates should complete their official registration during April 15-16th. A president-elect will start his term immediately after the result is announced on May 10th.

Following the verdict, the Korean stock market has rallied, backed by the decrease of political uncertainties. From now on, we view the continuity of the Korean market rally to be most influenced by global macro events and improvement in Korean domestic economy. This is because the dominant factors that will drive the Korean economy are exports and facilities investments rather than the specific policies under the new government.

Nevertheless, there are some expected positive points after the impeachment.

First, economic sentiment may improve on the expectation of a new president and new policies. Currently, the opposition party (left-of-center) enjoys a higher approval rating than the ruling party, because of the Korean eagerness for a turnover of political power. If one of the opposition party candidates is elected as the 19th President of Korea, he will likely be able to manage state affairs relatively easily as the opposition holds a majority in the National Assembly.

Second, monetary and fiscal policies are likely to be accommodative to support the Korean economy. The new government is likely to employ a supplementary budget in the second-half of 2017 or in 2018, while the Bank of Korea will hold the policy rate at the current 1.25% for a while to stabilize the household debt.

Third, Chaebol’s governance will improve backed by the new government’s effort and public opinion. Mr. Moon, a frontrunner in the opposition party, emphasizes economic fairness and chaebol reform. Also, Chaebol’s political ties with the president and related parties are raised as a social problem due to the recent political scandal. So, the opposition party will propose the Economic Democratization Bill, which strengthens the rights of minority stockholders. This could be one of the catalysts to the Korean stock market, because it will enhance transparency in corporate governance and implementation on shareholder friendly policies, leading a positive effect on the inflow of foreign investors.

Finally, political tension between Korea and China can be alleviated. Although most presidential candidates seem to view the deployment of THAAD system as an irreversible outcome, they assert the need for communication with the Chinese government to ease the tension and relieve the burden of companies that trade with China. Especially, this will be helpful for the players related with Chinese consumption such as cosmetics and media.

The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.