Extraordinary political drama in South Korea is likely to exacerbate the already bleak outlook for Asia’s fourth-largest economy, analysts say, although some see reason for more optimism if a deeper crisis can be avoided.

South Korean President Yoon Suk Yeol abruptly announced plans to declare a martial law emergency on Tuesday evening, citing the need to protect the country from North Korea’s “communist forces” and root out “anti-state forces.”

The shocking statement, widely seen as a response to domestic political pressure, was reversed just hours later. Yoon’s decision to withdraw the order came after nearly 200 lawmakers forced their way into the National Assembly to vote unanimously to block the move.

The political whiplash thrust South Korea, a key U.S. ally and crucial link in international supply chains, into the global spotlight and rattled financial markets.

U.S.-listed Korean stocks fell sharply on Yoon’s initial martial law order, while the South Korean won hit a new two-year low against the U.S. dollar on the news. Since then, the currency has recovered most of its losses.

Shortly before markets opened on Wednesday, Kim Byung-hwan, vice minister for economy and finance, said the regulator was ready to provide 10 trillion won ($7.06 billion) “at any time” to stabilize the stock market, reported Yonhap News from South Korea agency reported.

South Korea’s Kospi index closed down 1.44% on Wednesday, paring losses of over 2% earlier in the day as opposition lawmakers launched impeachment proceedings against Yoon.

“Right now we have a much calmer situation, but given South Korea’s importance to the global supply chain, this remains a story to keep an eye on,” Deutsche Bank strategists said in a research note published on Wednesday.

Jonathan Garner, chief Asia and EM equity strategist at Morgan Stanley, told CNBC’s “Street Signs Asia” on Wednesday that the Wall Street bank was underweight Korean stocks.

“In our opinion, the Korean market is not in such a good position given the global economic slowdown, especially because it is one of the most trade-affected markets and regions that we cover, with all the current tariff and non-tariff issues,” said Garner.

“But there is also a semiconductor cycle that is gradually trending downwards, and on top of that, the automotive sector is severely impacted globally – and it has a strong presence in the Korean market,” he continued.

“Our economists were already projecting before these recent events that growth in Korea would fall below 2% next year, representing one of the largest slowdowns we would see globally.”

Tech giant Samsung, South Korea’s largest company, saw shares fall 1% on Wednesday, while battery maker LG Energy Solution and automaker Hyundai Motor posted losses of 2.8% and 2.4%, respectively.

Rory Green, chief China economist and head of Asia research at TS Lombard, said in a research note published on Wednesday that negative price movements and volatility in Korean assets and interrelated markets, particularly Asian foreign exchange markets, are likely to continue.

The South Korean won was last steady at 1,414.22 against the greenback, after depreciating to 1,444.93 on Tuesday – its weakest level since October 2022, according to LSEG data.

Trinh Nguyen, senior economist at Natixis, described Yoon’s move to declare martial law as a “very, very bad decision” that South Korea made at a bad time.

“Martial law has not been implemented since 1979 and is viewed as deeply negative. Therefore, the lifting of martial law is positive. However, it has brought a lot of political uncertainty going forward, especially about President Yoon’s future,” Nguyen told CNBC’s “Squawk Box Asia” on Wednesday.

“These are not positive times for South Korea, are they? The chip cycle is in a downturn, as you can see, exports are down in October, the (Bank of Korea) has to cut interest rates (and) domestic demand is rather weak,” she continued.

“So we really need a strong government with a budget that is fiscally supportive not just in the short term but in the longer term to address the challenges posed not just by China but also by possible tariffs,” Nguyen said.

Not everyone was so optimistic about the market impact of the unfolding political drama in South Korea.

“New reports now suggest that Yoon will be indicted or resign fairly quickly, which could help investors draw a line under the affair,” Thomas Mathews, head of Asia Pacific markets at Capital Economics, said in a statement Research note published on Wednesday.

“Presidential impeachments are not unprecedented in Korea, and at least the country’s stocks ultimately performed quite well during the most recent impeachment in 2016-2017,” he added.

While Matthews acknowledged that the chaos comes at a difficult time for South Korea, the Capital Economics team said there is reason to be more optimistic as long as a deeper crisis can be avoided.

“After all, Korea’s big tech companies are generally well-positioned to benefit from the current enthusiasm for AI and technology in general. “So if investor sentiment towards the country takes a turn for the better at some point, we think that could have a pretty significant impact,” Matthews said.

“But more water probably needs to flow under the bridge first,” he added.