Why South Korea’s Political Chaos Is Putting 2025 At Grave Risk

South Korea has a knack for picking solid central bank heads.

Since April 2022, Bank of Korea Governor Rhee Chang-yong has been as steady a hand as you’ll find anywhere. In August 2021, Rhee’s predecessor Lee Ju-yeol was the first major central banker to hike interest rates during the pandemic. As a result, Korean inflation never reached heights seen from the U.S. to Japan.

Lee led the BOK with skill and distinction from 2014 to 2022. That’s saying a lot, considering he had to fill the shoes of Kim Choong-soo, who expertly steered the economy from 2010 to 2014. That was a period of extreme turmoil in emerging markets as the Federal Reserve began the process of normalizing U.S. rates.

The deftness with which one BOK leader after another operated helped Korea navigate around the 2008 Lehman Brothers debacle, the 2013 “taper tantrum” and the 2020-2021 pandemic. Long before all this, the BOK helped South Korea recover first from the 1997 Asian financial crisis.

Then came President Yoon Suk Yeol’s reckless martial law decree. That December 3 stunt continues to shake Korea Inc. in unpredictable ways, including getting Yoon impeached.

The political mess Yoon created is one modern history’s worst self-inflicted economic wounds. Or as Danny Kim, economist at Moody’s Analytics, calls it, the “shambolic and drama-filled political backdrop in South Korea” that has Seoul in disarray. And it’s putting Rhee’s BOK to the test in ways no policymaker could’ve seen coming.

On Wednesday, Rhee warned that the headwinds Yoon created are increasingly weighing on Asia’s fourth-biggest economy. Already, the BOK is mulling a downgrade to this year’s gross domestic product rate.

Yoon’s December 14 impeachment created unprecedented uncertainty. Economic confidence hangs in the balance as constitutional judges weigh how to rule on Yoon’s fate over the next 180 days.

That’s not to say Rhee isn’t trying to find rays of hope. “Volatility in domestic financial and foreign exchange markets has shown signs of stabilization after surging in the wake of the martial law declaration,” Rhee says. “While uncertainty remains, the political schedule ahead is now considered somewhat clearer.”

Or not. As the next six months play out, little, if anything, will be done in Seoul to raise South Korea’s economic game. Or even to batten down the hatches as a coming Trumpian storm imperils the global financial system.

The bigger problem is that Yoon’s first 954 days in office were rather devoid of moves to increase competitiveness, reduce record household debt, boost average incomes or strengthen South Korea’s business environment. That’s 31 months South Korea can’t get back.

Unfortunately, Yoon isn’t the first South Korean leader to let chronic complacency rule the day. His predecessor Moon Jae-in took office in 2017 with big talk of leveling playing fields and pivoting to a “trickle-up growth” model to better distribute income gains. He put few wins on the scoreboard.

Park Geun-hye’s 2013-2017 presidency started with bold plans to build a more “creative” economy and reduce the economic concentration enjoyed by a handful of family-owned conglomerates, or chaebols. It ended with impeachment and a jail sentence.

From 2008 to 2013, Lee Myung-bak also promised to shift engines away from exports and morph South Korea into a top-seven economy. Clearly, neither happened in Lee’s watch.

Yet the vacuum that Yoon created could mean an even deeper and more extended lost period for recalibrating growth drivers. South Korea hasn’t a moment to waste as China’s rise speeds up Asia’s economic clock.

China’s property crisis and resulting deflation don’t alter the fact that its economy is disrupting the global landscape bewilderingly fast. Or why nations from South Korea to Indonesia are in harm’s way as President-elect Donald Trump returns to the White House.

South Korea, though, has remained stuck in place, policy-wise, for nearly two decades now. Lots has happened globally, but the underlying dynamics of South Korea's economy remained largely the same.

Officials in Seoul hate comparisons to Japan over the last 25 years. But Japanification risks abound as Korean government after government prioritizes protecting the status quo over economic reform. And relies on BOK leaders, skilled as they are, to save the day.

Rhee’s team is even more on the hot seat than predecessors as Yoon’s gambit goes awry and drags South Korea’s economy down with it. How he handles things is an open question. But there’s no playbook for the BOK to consult as Seoul politics loses the plot.