Kwon Goo-hoon, senior Asia economist and managing director at Goldman Sachs / Courtesy of Goldman Sachs

The recent martial law fiasco poses a greater risk to the Korean economy compared to developments in the impeachments of the country's two former presidents, Goldman Sachs said in a report on Tuesday. Former Presidents Roh Moo-hyun and Park Geun-hye were impeached in 2004 and 2016, respectively.

Underpinning the assessment are a China slowdown and U.S. trade uncertainties, factors that cloud Korea's export-reliant economic growth outlook.

For context, spillovers from the previous impeachments on the Korean economy were buffered by a China boom in 2006 and a strong upturn in the semiconductor cycle in 2016.

Nevertheless, sufficient monetary and fiscal policy space remains a silver lining. Further monetary stimulus in the pipeline, along with tempered inflation and a weak growth profile, will warrant the Bank of Korea's (BOK) monetary easing.

“We maintain our below-consensus growth forecast of 1.8 percent for 2025, yet with risks increasingly skewed to the downside,” said the report authored by Kwon Goo-hoon, senior Asia economist and managing director at the global investment bank powerhouse.

The two impeachment cases in 2016 and 2004, where political instability did not weigh meaningfully on growth, do not provide a good benchmark, Kwon said.

“The Korean economy in the previous two cases had external tailwinds from the China boom in 2004 and a strong upturn in the semiconductor cycle in 2016," Kwon said. "Conversely, in 2025, Korea together with other export-oriented economies in the region faces external headwinds from a China slowdown and U.S. trade policy uncertainties.”

The government will likely focus on ensuring near-term stability in financial markets and sustaining macroeconomic stability as well as implementing existing policies, in his view.

“First, the government announced market stabilization measures, including a bond stabilization fund of 40 trillion won and an equity stabilization fund of 10 trillion won, as well as the BOK's unscheduled open market operations though its repo facilities.”

Sizable foreign-asset holdings of the National Pension Service (NPS) and its mean-reversion portfolio — $490 billion, equal to 26 percent of Korea's GDP — should help support foreign exchange and securities markets in the event of undue market distress.

“Weakening pressures for the Korean currency could be reduced by rebalancing the NPS portfolio towards under-weighted domestic securities from foreign assets that are currently held in excess of NPS benchmarks.”

The economist expects the government's drive for the Corporate Value-up Program to continue, supported broadly by the public and across the political spectrum.

“Our strategy team believes that the equity market environment for ordinary shareholders should continue to improve as the opposition party supports a re-rating of Korea's stock market, as evidenced by the boost-up project and multiple bill proposals, including a revision of the Commercial Law to strengthen fiduciary obligations of boards of directors to ordinary shareholders.”

Key events to watch include further impeachment motions, the formation of a transition cabinet, parliamentary discussion of the 2025 budget, including government support of the chip industry and cancellation of the financial investment tax, and upcoming monetary policy meetings in the first quarter of next year.