Ministry of Economy and Finance

On October 10, during the ASEAN Summit in Vientiane, Laos, Korea and Laos signed[1] a Framework Arrangement (F/A)[2] for the Economic Development Cooperation Fund (EDCF)[3] in the presence of the leaders of both countries.   The EDCF provides concessional loans to developing nations under long-term, low-interest terms to support their economic and industrial development.   With the signing of the F/A, the EDCF loan support for the government of Laos will amount to $500 million from 2024 to 2027, maintaining the same funding level as the previous agreement from 2020 to 2023.   Laos, this year’s ASEAN Summit chair and one of Korea’s key Official Development Assistance (ODA) partners, has a strong demand for development and is a country of significant interest for Korean businesses.   This renewed agreement is expected to enhance partnership in high-value infrastructure projects, such as water resources and transportation, and further accelerate bilateral infrastructure collaboration, especially following the ASEAN Summit.   The signing of the EDCF F/A is set to include the approval of second phase of the “Comprehensive Management of the Mekong Riverbanks in Champasak Province” in October. This project is anticipated to make a significant contribution to improving the quality of life for local residents and promoting regional economic development by addressing Laos’ chronic flood and erosion issues along the Mekong River.   The Ministry of Economy and Finance has committed to fully supporting Laos’ goal of graduating from the Least Developed Country (LDC) status by 2026. In addition, the ministry will work towards expanding the participation of Korean companies in development projects in Laos, facilitating their entry into global markets. [1] Signatories: Cho Tae-yul, Minister of Foreign Affairs of Korea, and Santiphab Phomevihane, Minister of Finance of Laos. [2] Framework Arrangement: An intergovernmental agreement that pre-sets the loan period and the funding ceiling, serving as a comprehensive replacement for individual agreements within the specified period and limits. [3] The EDCF is a fund provided by the Korean government to developing countries on long-term, low-interest terms to support their economic and industrial development (concessional loans). Please refer to the attached files. 

[FTSE Fixed Income Country Classification Announcement, October 2024]   On October 8, FTSE Russell[1] announced the “FTSE Fixed Income Country Classification Announcement, October 2024”. In this classification, FTSE Russell revealed its plan to include Korea in the World Government Bond Index (WGBI)[2].   FTSE Russell noted, “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 fulfilment of the criteria for a Market Accessibility Level of 2.”   FTSE Russell highlighted that the Korean government completed significant improvements in its foreign exchange (FX) market structure, including allowing third-party FX transactions and extending FX trading hours (July 2024); in addition, the government opened an omnibus account for government bond linked with the international central securities depositories (June 2024) and continuously worked on resolving challenges related to tax exemptions and the Legal Entity Identifier (LEI). Furthermore, FTSE Russell spoke highly of Korea’s implementation of institutional reforms to meet the stringent requirements for inclusion in the WGBI, along with the government’s ongoing endeavors[3] to actively address the practical feedback of global bond investors to promote and expand international investment.*   * “FTSE Russell congratulates the South Korean MOEF on its efforts to expand and encourage global investment in its local government bond market by implementing changes that have met the rigorous criteria for WGBI inclusion, as well as its ongoing commitment to addressing the practical feedback of international bond investors participating in its evolved market structure.”   [Procedures for Korea’s inclusion in the WGBI]   FTSE Russell announced that following the decision to include Korea in the WGBI, the actual reflection of Korea in the index will commence in November 2025; the process will be  carried out gradually over a year, with quarterly increases in Korea’s weight within the index. As of October 2024, Korea’s projected weight in the index is 2.22%, ranking as the 9th  largest among the included countries. FTSE Russell has planned its phased approach to provide global market participants ample time to prepare for Korea’s inclusion; the Korean  government bonds will be included in the index profiles one year after the announcement, and the inclusion ratio will gradually increase over the course of the following year.   FTSE Russell has also noted that it will continue to conduct an annual review of government bond markets, with the Fixed Income Country Classification published in March and  September each year. As part of these reviews, it will gather ongoing feedback from index stakeholders to ensure Korea’s smooth inclusion in the WGBI. In addition, it has encouraged  global financial market infrastructure providers to continue their preparations, so that global investors can invest in Korea’s bond market and benefit from its institutional improvements.   However, it was noted that 50-year bonds will be excluded from this inclusion due to their relatively recent issuance, limited outstanding balance, and lower liquidity.   [Expected effect]   The inclusion of Korea in the WGBI is expected to stabilize interest rates, leading to reduced funding costs for both the government and businesses, while also increasing liquidity in the FX market. As stable foreign investment funds tracking the WGBI flow in[4], a broad interest rate reduction[5] is anticipated across short- to long-term bonds.   Moreover, the expanded demand for government bonds is expected to enable more stable medium- to long-term fiscal management. The funds following the WGBI are predominantly passive investment with lower volatility and higher predictability, unlike short-term capital seeking rapid gains. This helps establish a stable demand base for government bonds, preparing Korea for any unexpected fiscal expenditures.   Not only that, it is anticipated to elevate Korea’s global financial standing; it signifies international recognition of the country’s economic stability, sustainability, reliable and transparent policies, and effective, open financial market. In the same context, the inclusion will enhance Korea’s sovereign credit rating, benefiting both the financial markets and the real economy.   [Implications and future plans]   Deputy Prime Minister Choi Sang-mok welcomed FTSE Russell’s decision to include Korea in the WGBI. He pointed out that this reflects the global financial market’s confidence in Korea’s solid economic fundamentals, fiscal soundness, and the policy direction pursued over the past two years under the current government. Along with it, he reiterated the government’s commitment to ensuring Korea’s smooth inclusion into the WGBI by reviewing and upgrading relevant systems as well as maintaining open communication with global investors; also, the government will meticulously monitor market conditions, particularly in response to global financial market fluctuations, and will manage any potential risks with vigilance.   [1] FTSE Russell is a subsidiary of the London Stock Exchange Group and is one of the world’s largest providers of market indices, alongside S&P Dow Jones, MSCI, and CRSP. [2] The WGBI is a leading index that includes government bonds from 26 major countries. With an estimated $2.5 trillion in assets tracking this index, it is the largest global bond index. [3] In 2024, nine roundtable discussions have been held with local bond investment institutions; four of these meetings took place in Tokyo, two in Hong Kong, two in London, and one in Singapore. [4] Considering Korea’s 2.22% weight, around $56 billion in government bond capital is estimated to flow into the country from the capital tracking WGBI. [5] If $50 to $60 billion in government bond funds flow in due to the WGBI inclusion, a decrease in interest rates of approximately 0.2% to 0.6% is anticipated. (Korea Institute of Finance, Dec 2023). Please refer to the attached files. 

On October 7, during the Korea-Philippines summit held in Manila, Philippines, Deputy Prime Minister Choi Sang-mok and Philippines’ Finance Secretary Ralph G. Recto signed a memorandum of understanding (MOU) for the Laguna Lake circular road and the Panay-Guimaras-Negros (PGN) bridge construction projects, in the presence of the leaders of both countries. In addition, a loan agreement for the second phase of the Samar Pacific Coastal Road project was also signed during the summit.   Both Laguna Lake circular road and PGN bridge construction projects are mega landmark projects, each of which received the record $1 billion EDCF[1] loan, ranking as the first and second largest projects in the fund’s history. These projects will proceed through competitive bidding limited to Korean companies, supporting their expansion into infrastructure markets of the Philippines and Southeast Asia.   First, the Laguna Lake circular road construction project (Phase 1) involves building a circular road consisting of elevated roads and embankments along the western shoreline of Laguna Lake, near the capital, Manila. This project is expected to address the rapidly increasing traffic demand in the area, enhancing its economic growth potential. The EDCF will provide $905 million to support 7.9 kilometers of the project, which spans a total of 37.5 kilometers.   Second, the PGN construction project aims to build a bridge connecting three islands (Panay, Guimaras, and Negros) in central Philippines. By constructing this bridge in an area that accounts for over 50% of the Philippines’ tourism revenue, the project is anticipated to improve transportation convenience between the islands, boost the tourism industry, and elevate the living standards of local residents. The EDCF plans to provide over $1 billion for the construction of the first bridge (connecting Panay and Guimaras Islands, totaling 13km), marking the first mega project in the fund’s history to exceed $1 billion.   The government is promoting the expansion and enhancement of Official Development Assistance (ODA) to fulfill its responsibilities and roles as a global pivotal state, enabling support for single projects exceeding 1 trillion won. This development will serve as a catalyst for the successful bidding of Korean firms in future projects, further facilitating their entry into global markets. The subsequent loan agreement[2] for the second phase of Samar Pacific Coastal Road project ($110 million) involves the construction of two new bridges and the renovation of roads (13km). This projects is a continuation of the first phase, completed in 2023, which is a key initiative for the Philippines, evidenced by the attendance of the Philippine president at the completion ceremony. The successful completion of the second phase is expected to significantly shore up bilateral ties.   Going forward, the government plans to actively link the EDCF with external strategies to strengthen cooperation with key partner countries, such as the Philippines, which have high potential for economic partnership, while exploring large-scale projects to support the overseas expansion of Korean businesses.   [1] The EDCF is a fund provided by the Korean government to developing countries on long-term, low-interest terms to support their economic and industrial development (concessional loans). [2] A contract outlining specific support terms and detailed procedures for a project, providing the institutional framework for individual projects. Please refer to the attached files.