November 23, 2024

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An electronic board shows the Kospi standing at 2,741.81 points at a dealing room of the Hana Bank headquarters in central Seoul on Thursday. (Yonhap)

Korea failed to join the World Government Bond Index, a global benchmark that measures the performance of sovereign bonds, but it remains hopeful as the index provider gave a positive evaluation of its latest efforts to improve market accessibility.

The WGBI, managed by Financial Times Stock Exchange Russell, is one of the three major government bond indices along with the Bloomberg-Barclays Global Aggregate Index and JP Morgan Government Bond Index-Emerging Markets. It is tracked by global funds worth over $2.5 trillion.

FTSE Russell, the index operator, announced Wednesday that Korea will remain on the watch list for potential reclassification. Korea has been on the watch list since September 2022.

It further added that it acknowledges that “local market authorities have made meaningful progress in the implementation of initiatives intended to improve the accessibility of South Korean government bonds for international investors.”

“Though Korea did not win an upgrade on the classification, there was a difference in the tone of the FTSE Russell on its evaluation of the local market. We remain optimistic about the inclusion happening shortly,” an official from the Finance Ministry said.

Though Korea met all the other requirements, it has been on the watch list for over one and a half years as the index operator views that it lacks accessibility for foreign investors. Its market accessibility is rated to be at Level 1, the middle in a three-tier system.

The Korean government has been working on lowering the bar for foreign investors, such as exempting tax on capital gains derived from government bond investments since January 2023 and abolishing the Investor Registration Certificate in December.

The country also plans to extend the operating hours of Korean won trading hours from July and is currently running a pilot test.

The index provider said the latest improvements initiated by the government would “facilitate the fulfillment of the criteria for a Market Accessibility Level of 2 and inclusion in the FTSE WGBI.”

Though the Korean government had initially hoped to make the list in September 2023, the goal remains unachieved. FTSE Russell reviews possible constituents every six months and the last evaluation was in September.

“The government will push initiatives to improve the foreign investment, hoping to make the WGBI this year,” the Finance Ministry said through a press release issued shortly after the FTSE Russell’s classification announcement.

"Apart from the improvements on the initiatives, it will expand communication with global investors, assessing their accessibility to the market and its attractiveness to be an important factor for the inclusion."

Considering it normally takes two to three years for a country to move from the watch list to the index, and that Korea made it to the watch list in September 2022, the inclusion is likely to happen in September 2024 at the earliest.

The market expects the inclusion to happen shortly, even if Korea fails to win an upgrade in September.

“Considering the directives (for market accessibility improvement) have not yet fully come into force, the market expectation of Korea making the watch list was not high,” analyst Lim Jae-kyun from KB Securities said.

"If the government's initiatives are implemented as planned, the requirements for an upgrade on market accessibility of Korean sovereign bonds will be fulfilled," he explained.

Lim further projected the inclusion is likely to happen in March 2025 due to the time gap as the market classification decision has to reflect feedback from global asset managers.

Korea is projected to take up some 2.35 percent of the index when it makes its debut, leading to an inflow of foreign capital around $60 billion.

Through Wednesday’s announcement, FTSE Russel said it would add Portugal to the index effective November. The country returned to the index after being excluded in 2012 due to a fall in credit rating. It further removed Switzerland from an upgrade watch list. India has been retained on the watch for an upgrade, along with Korea.

By Im Eun-byel (silverstar@heraldcorp.com)
The Korea Herald