South Korea is facing significant economic challenges following the recent 12.3 emergency declaration, prompting discussions on necessary policy responses and potential supplementary budgets to stimulate the struggling economy.
During a forum held on January 24, 2025, titled 'Economic, Humanitarian, and External Security Situations After the State of Emergency,' held at the National Assembly, speakers analyzed the continuing impacts of the emergency and sought various solutions to revitalize the economy.
The declaration led to dramatic shifts in the financial markets, marked by the won-dollar exchange rate surging to its highest point since the global financial crisis, reaching 1,487 won per dollar. According to 예승우 from the National Assembly’s Budget Policy Office, “The surge in exchange rate has increased volatility and prices simultaneously, affecting private consumption and business investment adversely.”
Foreign capital has fled the international markets, significantly impacting the stock and bond markets as foreign investors sold off large portions of South Korean Treasury futures. This flight has exacerbated financial market instability. The Bank of Korea has since revised its forecast for economic growth down from 1.9% to between 1.6-1.7% owing to weakened private consumption and poor exports, highlighting the dire state of the economy.
Nevertheless, 신관호, a professor at Korea University, pointed out the resilience afforded by South Korea's foreign reserves and current account surplus, as they have helped cushion the immediate impacts of currency volatility. Yet, he warned, “The selling pressure from foreign investors in the Treasury market poses risks to stabilizing the exchange rate.”
The repercussions of the emergency extend far beyond financial markets; they have deeply affected the everyday lives of citizens. Consumer confidence has plummeted, exhibiting the most significant drop since the COVID-19 pandemic. Alarmingly, 82% of small business owners reported experiencing decreased sales. Particularly, small and medium enterprises have faced double pressure from dwindling consumer demand and currency fluctuations, exacerbated by rising capital pressures.
“The rate of default on loans for small merchants has hit record highs,” stated 류필선, an expert at the Small Business Association, urging, “The government must swiftly implement more substantial fiscal support and policies to stabilize lives.”
The employment figures paint another bleak picture. The number of temporary and daily workers saw over 50,000 job losses compared to the previous year, representing the worst decline seen in four years. Employment reductions are most severe within sensitive sectors such as construction and wholesale trade, leading experts to voice concerns over the durability of this trend.
On the international stage, the ramifications of the emergency are just as pressing. 서정건, a professor of political science at Kyung Hee University, asserted, “Failure to adapt appropriately to shifts such as the new U.S. administration’s tariff and industrial policies could negatively impact South Korea's international credibility.” He warned, “The disarray from the state of emergency could potentially jeopardize South Korea’s diplomatic standing at key international events like the APEC summit.”
Against this backdrop, 우원식, the Chairman of the National Assembly, emphasized the imperative of political accountability and responsive measures: “The emergency situation has triggered a crisis for democracy; yet, the National Assembly has swiftly resolved these issues and now must refocus on economic recovery, humanitarian needs, and diplomatic stability.” He has articulated plans to assess the state of the economy and propose measures via various working groups within the Assembly.
During the forum, experts agreed on the necessity of strong fiscal policies geared toward political stability and supporting the economic welfare of citizens; these, they argued, would remain pivotal for successful recovery from the emergency’s impacts.
These discussions come as the government hints at the potential implementation of supplementary budgets. The Ministry of Economy and Finance has opened the door for discourse on additional fiscal measures for 2025. Experts advocate urgency, citing declining growth forecasts, attributing some challenges to the broader global tariff wars initiated by former U.S. President Donald Trump.
According to the Ministry, supplementary budgets can be allocated when events like wars, disasters, or economic recessions occur. Current predictions show growth hovering around 1%, coupled with inflation rising above 2%, risking entry to stagflation—a situation where economic growth falters alongside rising prices.
The National Assembly's own Budget Policy Office indicated the requirement for pro-active fiscal measures. “Quick execution of reappropriated government funds solely cannot support economic recovery or adequately address the pains faced by the vulnerable demographic categories,” it noted.
The ruling party has proposed potential allocations for fiscal measures including cash transfers to citizens as articulated by the Democratic Party, relating back to campaign promises by leader 이재명. Conversely, the government insists the primary focus should first stabilize the humanitarian economy and bolster advanced industries.
Insights from past administrations show how previous governments navigated crises through supplementary budgets. From 1998 onwards under the Kim Dae-jung administration through to the Moon Jae-in presidency, multiple supplementary budgets were deployed to combat economic downturns, education, job creation, and disaster recovery. Historical patterns reveal the importance of prompt fiscal response mechanisms to bolster economic fortitude.
The contrasting approaches within the current ruling party concerning the proposed budget allocations highlight the complexity of the political climate as the impacts of the emergency continue to reverberate through the economy. Further analysis suggests the importance of cooperative policymaking between the government and opposition to forge effective responses soon.
While the debate over fiscal measures intensifies, experts also caution against playing with the deficit levels, warning it could lead to significant increases in interest rates and national debt burdens, also risking the nation’s credit rating.
Lastly, with the 2025 economic environment uncertain, whispers of heightened scrutiny on the current administration's approach toward fiscal policy continue as observers note potential slides stemming from Trump’s America-First policies. It remains uncertain how deeply South Korea's growth will be impacted as competing narrative strategies emerge between political factions.