South Korea’s Financial Supervisory Service Governor, Lee Bok-hyun, expressed strong confidence on Tuesday regarding the nation’s potential inclusion in FTSE Russell’s esteemed World Government Bond Index (WGBI) this month. This optimism follows the recent relaxation of certain regulations aimed at attracting foreign capital and enhancing currency market stability.
The eagerly awaited announcement from FTSE Russell regarding the reclassification of countries is scheduled for the end of September. South Korea has been actively pursuing this inclusion since last year when it lowered taxes on overseas investments in Korean Treasury bonds.
In February, South Korea took decisive steps to meet the rigorous requirements set forth by WGBI. These measures included extending forex trading hours to encompass London trading hours, streamlining registration procedures for foreign equity investors, and charting a course to open its onshore currency market to registered foreign institutions in the latter half of 2024.
A significant milestone on the road to inclusion was reached just last month when Euroclear Bank and Clearstream entered into an agreement with the Korea Securities Depository to establish an omnibus account for Korea Treasury bonds. This development aligns with another key WGBI requirement: facilitating bond market transactions via international securities depositories.
South Korean authorities estimate that WGBI-related capital inflows into Korean Treasury bonds could surge to as much as Won90tn ($67bn), a noteworthy boost given that approximately $2.5tn worth of global bond funds currently track the WGBI. If South Korea secures its place, Korean Treasury bonds are poised to enter the index with a weighting ranging from 2-2.5 percent.
Nonetheless, South Korea is still confronted with challenges in its pursuit of attaining developed market status according to MSCI (Morgan Stanley Capital International). A major obstacle in this endeavor remains the restrictions on offshore trading of the won, driven by lingering concerns stemming from the unregulated forex markets during the Asian financial crisis of the late 1990s. South Korean authorities are not presently contemplating the relaxation of these currency trading restrictions but remain hopeful about achieving developed market status by 2024 or 2025.
Another critical condition for the MSCI upgrade involves the complete removal of South Korea’s short-selling ban, initially imposed at the onset of the Covid-19 pandemic to curb market volatility. While some easing of this ban occurred in 2021, permitting the sale of borrowed large-cap shares in the Kospi 200 and Kosdaq 150 indices, Governor Lee remains opposed to a full reinstatement of short-selling this year due to heightened market volatility and a sluggish domestic stock market.
As the official announcement from FTSE Russell draws near, South Korea awaits a pivotal moment that could significantly impact its financial landscape and international standing.
