Korea’s CDS premium rising (36.36bps as of Mar 27)
Constitutional Court impeachment ruling delayed to April
Citi and Nomura indicate sovereign credit risk rising
U.S. imposes 25% tariff on foreign automobiles from April 2
Foreign research firms lower Korea’s 2025 GDP forecasts
Foreign investors net-selling Korean government bonds
Opinion
Political uncertainties combined with external tariff pressures significantly raise Korea’s credit risk, negatively impacting investor sentiment and economic stability.
Core Sell Point
Rising CDS premiums amid political and tariff uncertainties increase downside risk to Korean assets.
Korea's 5-year Credit Default Swap (CDS) premium is rebounding sharply amid persistent political uncertainty and escalating tariff pressures from the U.S., raising concerns about the country's sovereign credit risk. As of March 27, the premium stood at 36.36 basis points (bps), up significantly from its recent low of 28.13bps recorded on February 27. The premium previously peaked at 40.42bps in mid-January, highlighting heightened market caution.
Political instability remains a critical driver of risk sentiment as the Constitutional Court delayed its impeachment ruling against President Yoon Suk-yeol from March to April amid intense protests. Citi has warned prolonged political uncertainty could place downward pressure on Korea's sovereign credit rating and weaken economic policy stability. Similarly, Nomura notes that ongoing uncertainty could prompt investors to anticipate further rate cuts by the Bank of Korea, increasing the risk premium on Korean assets.
Externally, Korea faces renewed economic threats following President Trump’s announcement of a 25% tariff on foreign automobiles starting April 2, directly impacting Korea’s key export industry. S&P recently highlighted that such tariffs pose substantial risks to Korea's export-dependent economy, leading multiple international institutions—including Capital Economics, Barclays, HSBC, and S&P—to revise down Korea's 2025 GDP growth forecasts.
Foreign investor sentiment has also notably deteriorated, shifting to net selling in Korean government bond futures. Specifically, net outflows from 3-year bonds began on March 25, while 10-year bonds have seen continuous outflows since March 18. JP Morgan emphasizes that Korea’s financial markets urgently require clearer signals regarding the impeachment timeline and forthcoming economic stimulus measures.
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