MSCI keeps Korea in emerging market index, delaying classification upgrade hopes
The index provider also declined to add Seoul to its watchlist, citing limited won convertibility and thin liquidity during extended trading hours. The government's goal of joining the developed market index in 2027 is now out of reach.
People celebrate as the Kospi crosses 9,000 points at Woori Bank in central Seoul on June 18.NEWS1
Morgan Stanley Capital International (MSCI) has kept Korea in its emerging market category and declined to place it on the watchlist for developed market status, dealing a setback to an upgrade Seoul has pursued since 2008.
The decision, which the U.S.-based index provider announced before the Seoul market opened Wednesday, denies Korea the first step toward a reclassification that BNP Paribas Securities estimates could draw $30 billion in passive foreign inflows.
Because MSCI requires a market to sit on its watchlist for at least a year before any upgrade can take effect, the government’s goal of joining the developed market index in 2027 is now out of reach. The earliest realistic path is through a fresh bid at next year’s review. If Korea is placed on the watchlist in 2027, then the MSCI could announce its reclassification in 2028 and include the country in its developed market index in late May 2029.
The rejection did not come as a surprise. In a separate market accessibility review released on Friday, MSCI stated that Korea needed improvement on five of its 18 accessibility criteria: foreign-exchange market liberalization; investor registration and account opening; information flow; clearing and settlement; and securities transferability. While Korea earned a passing grade in the availability of investment instruments category this year, every market in MSCI’s developed tier is flagged on no more than one criterion.
The finance company cited foreign exchange access as the central barrier.
“The [local currency] is not deliverable offshore,” MSCI said. “Even more concerning, onshore liquidity during the extended [foreign exchange] trading hours remains largely insufficient to support tight execution at standards comparable to those observed in developed markets, constraining [foreign exchange] operational flexibility for index replicators and others.”
Offshore, the won is rarely delivered in physical form; trades are typically settled in dollars through nondeliverable forwards.
MSCI also pointed to a rigid investor identification system and restrictions on in-kind transfers and off-exchange trading. It acknowledged the reforms that Korean authorities have implemented but said that “investors have communicated that the underlying issues have not been fully resolved,” adding that market participants need time to “thoroughly evaluate the sustained effectiveness of the changes.”
The logo of Morgan Stanley Capital InternationalREUTERS/YONHAP
The Ministry of Finance and Economy and the Financial Services Commission said that they would continue to push for the reclassification.
“MSCI is aware of the government’s efforts and progress in advancing the foreign exchange and capital markets,” the two bodies said in a joint statement. “If we steadily pursue [related] reforms according to our own needs and schedule, we expect that Korea will then be included in the developed market index.”
Authorities previously set 39 tasks under a road map and plan to complete 28 of them by the end of this month. Even then, the effects must be felt in the market before they count toward an upgrade. A central reform — the shift to near-24-hour trading in the dollar-won market — takes effect on July 6, after the MSCI’s review, with an offshore won settlement system to follow.
MSCI first placed Korea on its developed market watchlist in 2008 but held off on reclassification, citing the difficulty of converting the won, and dropped the country from the watchlist altogether in 2014.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
