South Korea anticipates inclusion in FTSE Russell's World Government Bond Index

South Korea's Financial Supervisory Service Governor, Lee Bok-hyun, expressed confidence on Tuesday that the nation will be included in FTSE Russell's World Government Bond Index (WGBI) this month, following the relaxation of some regulations. The inclusion is expected to attract billions in foreign capital and enhance currency market stability by bringing more mid-to-long-term bond funds into the market.

FTSE Russell's country reclassification announcement is due at the end of September. South Korea has been striving for inclusion since last year when it reduced taxes on overseas investment in Korean Treasury bonds.

In February, South Korea introduced several measures to meet the WGBI's requirements. These included extending forex trading hours to include London trading hours, simplifying registration procedures for foreign equity investors, and planning to open its onshore currency market to registered foreign institutions in the latter half of 2024.

An essential step towards inclusion was achieved last month when Euroclear Bank and Clearstream agreed with the Korea Securities Depository to open an omnibus account for Korea Treasury bonds. This move meets another WGBI requirement: enabling bond market transactions via international securities depositories.

South Korean officials estimate that WGBI-related inflows into Korean Treasury bonds could reach up to Won90tn ($67bn), considering that approximately $2.5tn worth of global bond funds follow the WGBI. If included, Korean Treasury bonds are likely to join the index with a weighting of about 2-2.5 per cent.

However, South Korea still faces challenges in its quest for promotion to developed market status by MSCI. One significant hurdle is restrictions on offshore trading of the won, reflecting concerns over unregulated forex markets rooted in memories of the Asian financial crisis in the late 1990s. While South Korean authorities are not currently considering allowing offshore trading of the currency, they anticipate achieving developed market status by 2024 or 2025.

Another condition for the MSCI upgrade is the complete removal of the country's short-selling ban, introduced at the onset of the Covid-19 pandemic to curb market volatility. In 2021, the government partially lifted this ban, allowing sales of borrowed large-cap shares in the Kospi 200 and Kosdaq 150 indices. However, Governor Lee opposes a full resumption of short-selling this year due to increased market volatility and a sluggish domestic stock market.

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