December 04, 2024

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Hana Bank dealing room at the bank's headquarters in Jung-gu, central Seoul, Oct. 4. (Yonhap)

South Korea finally succeeded in joining the World Government Bond Index, a global benchmark measuring the performance of sovereign fixed income. The inclusion is expected to draw in passive foreign funds worth over $56 billion.

The WGBI, managed by Financial Times Stock Exchange Russell, is one of the three key 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.

After missing out on the inclusion four times since it was put on the watchlist in September 2022, Korea has been added to the WGBI, according to FTSE Russell's announcement Wednesday. The inclusion will be effective from November 2025, phased in on a quarterly basis over a one-year period.

“While there are several ‘developed market club’ statuses, the WGBI has the trickiest qualifications. Korea’s inclusion reflects investors’ evaluation of the Korean market and economy,” Finance Minister Choi Sang-mok said at a press briefing held Wednesday.

FTSE Russell stated that local market authorities have implemented “several initiatives intended to improve the accessibility of South Korean government bonds for international investors,” facilitating the fulfillment of the market accessibility criteria.

More specifically, the operator pointed to local authorities’ efforts to allow third-party foreign exchange, the extension of won-dollar trading hours, and the launch of connectivity with International Central Securities Depositories as positive developments.

Korea is expected to be weighted 2.2 percent on the index, based on the size of its 62 eligible sovereign bonds with a total outstanding value of $712.5 billion. Though the weight could differ at the time of the actual inclusion, it is not likely to experience a major change, according to the Finance Ministry.

"It is safe to say that Korea will take up over 2 percent of the weight on the index at the time of the inclusion, as the size of the state-issued bonds does not change drastically," the official said. The concentration would be the ninth-largest among the 26 enlisted countries.

With the 2.2 percent weight, the inclusion will attract an inflow of passive foreign funds of around $56 billion, stabilizing the interest rate and bringing down the financing costs for the government and companies, according to the Finance Ministry.

As interest rates and bond prices have an inverse relationship, the inflow of investments on fixed income would lead to an effect of a 0.2-0.4 percent rate cut, according to the Korea Institute of Finance's estimate in December last year.

The ministry also projected that the enlistment would increase liquidity for the foreign exchange market.

“Furthermore, the WGBI is a credible index in the global financial market. The inclusion proves the integrity of Korea’s financial market, boosting its international credibility of Korea’s financial market,” the official elaborated.

Along with the announcement on the fixed income classification, FTSE Russell also released the categorization on equity markets. Korea’s stock market has maintained the Developed Market status, the highest in the four-tier system, since 2009.

Despite concerns that the country’s short selling ban could threaten its status, Korea was able to retain its Developed Market classification. In mid-June, Korea extended its short sales ban to March next year.

However, the index operator pointed out that further clarification on the ban is “critical” for Korea to maintain its status in the next round of evaluations set for release in March.

“The extended ban was not well received by the international investment community. Its absence is also seen to reduce the efficiency of stock borrowing mechanisms and impacts general market liquidity and price discovery,” the announcement read.

“Greater clarification on some aspects of the regulation is still required to create a workable solution.”

Choi stressed the government would push to boost the valuation of the stock market as well.

“With the 'Korea discount' on the local bond and foreign exchange market resolved through market reforms and the WGBI inclusion, the government will work for the fair evaluation of the local stock market through the corporate value-up program and have its effects trickle down on the real economy,” Choi said.

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