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One of South Korea’s top financial regulators is optimistic of inclusion this month in FTSE Russell’s World Government Bond Index, a market gauge expected to bring billions of dollars in foreign capital inflows.
Lee Bok-hyun, governor of the Financial Supervisory Service, expressed confidence that South Korea has fulfilled the requirements set by the index compiler through recent government rule adjustments.
“Our chances of being included [in the WGBI] are high this time around,” Lee told the Financial Times. FTSE Russell reviews potential constituents twice a year, with the latest evaluation taking place in March. “The time is ripe as we have satisfied most of the conditions that they have called for.”
FTSE Russell will announce its country reclassification at the end of this month. South Korea was added to the watch list a year ago following its decision to reduce taxes on foreign investment in Korea Treasury bonds.
“If included, more mid-to-long-term bond funds will flow into the market, contributing to the stability of the currency market. We are not so anxious about being included this time or six months later, but fewer restrictions have been imposed for the WGBI inclusion compared to the MSCI upgrade,” stated Lee, making reference to MSCI’s ongoing assessment of whether to grant South Korea developed market status rather than emerging market status.
In February, South Korea introduced measures such as extending forex trading into London hours, simplifying registration requirements for foreign equity investors, and opening up its onshore currency market to registered foreign institutions in the second half of next year.
Another requirement for South Korea’s inclusion in the WGBI is facilitating bond market transactions through international securities depositories. Last month, Euroclear Bank and Clearstream agreed to open an omnibus account for Korea Treasury bonds in partnership with the Korea Securities Depository.
Analyst estimates suggest that approximately $2.5tn worth of global bond funds track the WGBI, and South Korean government officials anticipate up to KRW90tn ($67bn) of inflows into Korea Treasury bonds associated with WGBI inclusion, with a projected weighting of around 2-2.5%.
Regarding South Korea’s goal of achieving developed market status with MSCI, a major obstacle is restrictions on offshore trading of the won, which stem from concerns about uncontrolled forex markets based on the experience of the late 1990s Asian financial crisis.
Lee stated that South Korean authorities are not currently considering permitting offshore trading of the currency, but he expects that the country will achieve developed market status next year or the year after. The index compiler requires time to monitor the implementation and effectiveness of Seoul’s reform measures.
Another condition for the MSCI upgrade is a complete lifting of the country’s short-selling ban, which was imposed at the onset of the Covid-19 pandemic to reduce market volatility. In 2021, the government partially lifted the ban, allowing the sale of borrowed large-cap shares in the Kospi 200 and Kosdaq 150 indices.
However, Lee opposes a full resumption of short-selling this year, stating that it is not the appropriate time to consider such a move due to the sluggish domestic stock market and increased volatility.
“We need to weigh its positive effects on investment and meet international standards, but the environment is not yet suitable as the stock market volatility has recently increased significantly,” he said. “We will carefully consider what to do.”
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