South Korean President Moon Jae-in's Democratic Party suffered a devastating defeat in a special election for mayoral posts in the country’s two largest cities, Seoul and Busan. “These mayoral elections became a referendum on the ruling party,” says APARC and Korea Program Director Gi-Wook Shin in an interview on CNBC Squawk Box Asia. “South Korean voters gave the Moon administration a red card.”

[Sign up for APARC newsletters to receive commentary from our experts.]

Anger at soaring housing prices and ongoing investigations into accusations of corruption has decimated the credibility of Moon and his left-leaning Democratic Party in the eyes of many voters. “The South Korean people have begun to believe that the current government is quite incompetent,” Shin says. In the foreign policy arena, too, the Moon administration has been on a downhill slide. It has failed to make a breakthrough on the stalemate with North Korea, has seen the relationship with Japan deteriorating to the worst it has ever been and is struggling to contend with China.

But it is domestic policy, particularly containing housing prices, that will be the key issue in next year’s presidential election, Shin argues. Another issue to watch is COVID-19, he notes. A year ago, South Korean voters rewarded the administration’s handling of the pandemic, but now the government is facing a backlash over its slow vaccine rollout.