[In-depth Economic Analysis] 1 Year After Martial Law (Part 1) - The Era of 1,400 Won Exchange Rate and the Lost First Quarter

[In-depth Economic Analysis] 1 Year After Martial Law Series (1/2)

It has been exactly one year since December 3, 2024, when the declaration of martial law left an indelible scar on the constitutional history of South Korea. Although it ended as a short 'happening' of only 6 hours, the cost of that fear on the Korean economy was truly immense. In Part 1 of this series, we uncover the 'economic costs' and 'structural changes' we had to pay over the past year through data.

1 Year After Martial Law (Part 1): The Fixation of 1,400 Won Exchange Rate and the Lost First Quarter

1. That Night, the Market Saw 'National Default'

At 10:30 PM on December 3, 2024, the surprise declaration of martial law directly hit 'geopolitical risk,' the weakest link in the Korean financial market. The market reaction at the time went beyond simple concern—it was Panic itself.

• Exchange Rate Skyrocketing: Despite the thin liquidity of the night hours, the KRW/USD exchange rate in the NDF market rose vertically, threatening the 1,480 won line. This was a shock comparable to the volatility during the 1997 Asian Financial Crisis or the 2008 Global Financial Crisis.
• Surge in Credit Default Swaps (CDS): The 5-year Foreign Exchange Stabilization Bond CDS premium, indicating Korea's default risk, surged by more than 20% in a single day, breaking through 40bp.

The international financial market recognized this event not as a temporary disturbance but as Korea's 'System Risk'. Although the situation ended around 4:30 AM due to the National Assembly's swift resolution for lifting (unanimous approval by all 190 present), the psychological Maginot Line of investors had already collapsed.

---

2. Spreading to the Real Economy: 'The Lost First Quarter'

The shock in the financial market spread to the real economy with a time lag. In particular, the bad news breaking just before the peak year-end season froze consumer sentiment. Companies put new investments on hold until uncertainties were resolved.

As a result, the Korean economy received a painful report card in the first quarter of 2025.

Indicator	Q1 2025 Performance	Remarks
Private Consumption	-0.1% (Negative Growth)	Aftermath of plummeting Consumer Sentiment Index (CCSI)
Facility Investment	-1.2%	Delayed investment due to uncertainty avoidance
Foreign Supply/Demand	Continued Selling	'Sell Korea' trend due to country risk avoidance

Specifically, sensitive sectors such as entertainment and tourism took a direct hit as cancellations by foreign tourists followed one another. This provided foreign investors, who were already recording record-high net selling in November 2024, a justification to leave the Korean market.

---

3. Remaining Scars: Why Won't the Exchange Rate Come Down?

One year after the incident, the CDS premium has stabilized at the 31.25bp level. However, the KRW/USD exchange rate is the one thing that fails to return to the past.

In past crises, the exchange rate showed resilience by quickly returning to the 1,100~1,200 won range after spiking. However, as of 2025, the exchange rate has become fixed (New Normal) in the 1,430~1,440 won range. Experts interpret this not merely as remaining political risk, but as a fundamental change in the supply and demand structure.

3 Factors Preventing Exchange Rate Decline

• Structural Dollar Demand by 'Seohak Ants': As domestic investors' investment in US stocks surges, there is a constant demand for buying dollars.
• Super Dollar and Trump 2.0: The 'American Exceptionalism' of the US economy and the tariff policies of the Trump administration support the strong dollar.
• Supply-Demand Mismatch in Trade Surplus: Dollars earned from exports are not converted domestically but lead to overseas reinvestment, weakening the exchange rate stabilization effect.

---

4. Closing: The Massive Stress Test Called Martial Law

The declaration of martial law was a massive 'Stress Test' for Korean democracy and the economic system. We avoided catastrophe and restored the system, but in the process, we received expensive bills called '1,400 Won Exchange Rate' and '1% Range Low Growth'.

However, there were opportunities amidst the crisis. In Part 2, we will analyze in depth how 'J-Nomics 2.0' and the Value-Up Program of the Lee Jae-myung administration, launched after the impeachment political situation, changed the market, and the meaning of the 'surprise growth (1.3%)' in the third quarter of 2025.

Part 1 Key Summary:
Martial law left a trauma called 'System Risk' on the financial market. In particular, the contraction in consumption and the exodus of foreigners caused negative growth in the first quarter, and due to the changed supply and demand structure, the high exchange rate in the 1,400 won range has become a new constant for the Korean economy.

The content of this blog is only for reference for investment judgment, and investment decisions must be made under the individual's judgment and responsibility. Under no circumstances can the information in this blog be used as evidence of legal responsibility for investment results.