Korea on watch list for WGBI inclusion; hoping for bond inflows

FTSE Russell, a global index provider, added South Korea to the watch list for potential inclusion in its FTSE World Government Bond Index (WGBI), prompting hopes for capital inflows into Asia’s fourth-largest economy needed to prop up its ailing won currency.

“South Korea will be placed on the Watch List for a potential upgrade to Market Accessibility Level ‘2’ and for consideration for inclusion in the FTSE World Government Bond Index (WGBI),” FTSE Russell said in a statement on Thursday.

“This follows announcements by the South Korean market authorities of several proposed initiatives intended to improve the market’s structure and the accessibility of South Korean capital markets.”

FTSE Russell classifies that only countries with bond markets having the highest grade and with bond market accessibility from Level 0 to Level 2 qualify for inclusion in the WGBI, one of the world’s top three bond indices. It is the first time for South Korea, which is currently on Level 1, to be on the watch list.

The index provider is scheduled to decide whether to include South Korea in the WGBI after reviewing fixed income country classification in March and September next year. It takes at least six months to adjust the market accessibility level, while the country needs to go through a grace period of some six months for actual inclusion in the index even after the provider decides to add the nation.

BOND INFLOWS

Once South Korea’s treasury bonds are incorporated into the WGBI, it is likely to lead to huge capital inflows into the country’s debt market, the government and analysts said. About $2.5 trillion of funds track the WGBI worldwide and financial institutions tracking the index make investments based on the weights of incorporated countries.

“The South Korean bond market was recognized as one of the advanced markets,” said Finance Minister Choo Kyung-ho after FTSE Russell’s announcement. “It is a crucial opportunity to tackle the discounts on won-denominated sovereign bonds and upgrade the government bond market to a developed market.”

The Ministry of Economy and Finance expected South Korea’s market weight in the WGBI to be around 2-2.5%, the ninth largest among the weights of 23 countries in the index. The US was the top country with a weight of 44% as of end-August 2021, followed by Japan with 15% and France with 7.4%.

The potential inclusion is predicted to lead foreign investors to invest up to 60 trillion won ($41.8 billion), according to the Korea Institute of Finance. Investment banks such as Goldman Sachs forecast bond inflows of as much as 90 trillion won.

Such inflows are likely to lower government bond yields, helping the government save up to 1.1 trillion won in borrowing costs, the finance ministry expected.

In addition, steady increases in demand for South Korea’s treasury bonds are predicted to enhance stability in the local currency and fixed income markets.

INITIATIVES TO IMPROVE STRUCTURE

FTSE Russell welcomed South Korea’s initiatives, such as the proposed exemption of the withholding tax levied on investors in treasury bonds and the proposed currency market reforms, intended to improve the structure and accessibility of its capital markets for both domestic and international investors.

The country has been taking various steps to improve the system, aiming for WGBI inclusion as a national task.

"The government will reform measures to increase market access to global investors and have more active communication with market players,” Choo said.

Write to Byung-Uk Do at dodo@hankyung.com
Jongwoo Cheon edited this article.