South Korea will be included in a global major bond index next year to attract an estimated $66 billion in capital inflows to Asia’s fourth-largest economy and save its ailing won currency.
FTSE Russell, the global index subsidiary of London Stock Exchange Group, said on Tuesday that South Korean government bonds will be added to the FTSE World Government Bond Index (WGBI) with inclusion starting in November 2025.
“Following this confirmatory announcement regarding index inclusion, FTSE Russell encourages global financial market infrastructure providers to continue their readiness activities to support future investment in the South Korean government bond market by WGBI users and leverage the benefits of the market structure reforms,” the index provider said in a statement.
The government bonds would represent 2.22% of the index on a market value-weighted basis, according to FTSE Russell.
The inclusion is expected to cut market values of government bonds of major countries such as the US, China and Japan in the index, the index provider said.
BOND INFLOWS
South Korea is expected to enjoy $66 billion in bond inflows as some $3 trillion of funds worldwide were estimated to track the WGBI, analysts said.
The WGBI is among the world’s top three indexes along with the JPMorgan Government Bond Index-Emerging Markets Index and the Bloomberg Barclays Global Aggregate Index. Those indexes are usually tracked by long-term investors.
Foreign investors’ holdings of South Korean government bonds are forecast to account for 27% of the total around the end of 2026, up from 20.6% last year, the finance ministry said.
The increase is predicted to lower borrowing costs by 1.1 trillion won ($818.5 million) a year, according to the finance ministry and foreign investment banks.
Such inflows are likely to support the South Korean currency and stock markets, economists said. The won has lost 4.3% against the dollar so far this year after depreciating 1.8% in 2023 and 6% in 2022, respectively. The benchmark Kospi has dropped 2.3% this year.
REFORMS
South Korea took various measures to be included in the WGBI as FTSE Russell added the country to the watch list for potential incorporation in the index in September 2022.
The London-based index provider had maintained the country on the list, saying the authorities need to improve the accessibility of the government bond market for global investors. It required the government to exempt taxes on interest incomes and capital gains, connect with International Central Securities Depositaries (ICSDs), abolish foreign investor registration and reform the foreign exchange market system.
The Ministry of Economy and Finance implemented policies for the requirements.
It launched connectivity with ICSDs in June with the government bonds now available for settlement on Euroclear and Clearstream after a link was established between the Korean Securities Depository (KSD) and these counterparties.
The government also allowed third-party foreign exchange and extended the won currency trading hours.
“Since being placed on the FTSE Fixed Income Country Classification Watch List in September 2022, several initiatives intended to improve the accessibility of South Korean government bonds for international investors have been implemented by South Korean market authorities, which have facilitated the fulfillment of the criteria for a Market Accessibility Level of 2,” FTSE Russell said.
The index provider classifies 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.
The finance ministry vows to further improve the accessibility until the government bonds are included in November 2025.
“The MOEF is committed to continuing and strengthening its engagement with market participants to ensure a smooth index inclusion starting in November 2025, which will bring a welcomed increase in international investment in our capital markets,” said Minister of Economy and Finance Choi Sang-mok in a statement.
Write to Kyung-Min Kang at kkm1026@hankyung.com
Jongwoo Cheon edited this article.