South Korea optimistic of inclusion in key world bond index

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, said he believed Seoul has met most of the conditions required by the index compiler after the government eased certain rules.

“Our chances of being included [in the WGBI] are high this time around,” Lee told the Financial Times. FTSE Russell reviews possible constituents every six months and the last evaluation was in March. “The time is ripe as we have met most of the conditions that they have been calling 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 cut 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 strings have been attached for the WGBI inclusion than for the MSCI upgrade,” said Lee, referring to MSCI’s continuing consideration of South Korea for developed market rather than emerging market status.

South Korea announced measures in February including extending forex trading into London hours, scrapping complex 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 allowing bond market transactions through international securities depositories. Last month, Euroclear Bank and Clearstream agreed with the Korea Securities Depository to open an omnibus account for Korea Treasury bonds.

About $2.5tn worth of global bond funds track the WGBI, according to analyst estimates, and South Korean government officials expect up to Won90tn ($67bn) of WGBI-related inflows into Korea Treasury bonds, which are likely to join the index with a weighting of about 2-2.5 per cent if included.

On the South Korean government’s other long-held goal of promotion to developed market status with MSCI, a sticking point is restrictions on offshore trading of the won, reflecting fears of uncontrolled forex markets — a scar from the Asian financial crisis in the late 1990s.

Lee said South Korean authorities were still not considering allowing offshore trading of the currency, but he expected the country to earn developed market status next year or the year after, with the index compiler needing 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, introduced at the outset of the Covid-19 pandemic to reduce market volatility. In 2021, the government partially lifted the ban, allowing sales of borrowed large-cap shares in the Kospi 200 and Kosdaq 150 indices.  

But Lee is against a full resumption of short-selling this year, saying it is not “the right time” to consider the move, given the sluggish domestic stock market and increased market volatility.

“We need to consider its positive effects on investment and meet international standards, but the environment is not ripe yet as the stock market volatility has increased a lot recently,” he said. “We will cautiously consider what to do about it.”