FTSE WGBI Watch List Inclusion
Korea Added to the Watch List for WGBI Inclusion
FTSE Russell issued FTSE Fixed Income Country Classification Announcement September 2022 on September 29 (US eastern time) and stated that Korea will be added to the FTSE Fixed Income Country Classification Watch List for the potential classification of its Market Accessibility Level from 1 to 2 and consideration for inclusion in the FTSE World Government Bond Index (WGBI).
FTSE Russell has placed Korea on the watch list for a potential upgrade to Market Accessibility Level ‘2’ for the first time since March 2019 when the country’s Market Accessibility Level was classified to 1.
FTSE Russell has added Korea to a watch list for potential inclusion in its FTSE WGBI as Korean market authorities proposed several new initiatives intended to improve the structure and accessibility of its capital market for both domestic and international investors. These include the proposed exemption of the withholding tax levied on investors in KTBs which is currently subject to approval by the National Assembly, the proposed reforms to improve accessibility to the Korean Won FX market, and plans to facilitate KTB trading via International Central Securities Depositories (ICSD).
Anticipated process of WGBI Inclusion
The announcement has increased the possibility of upgrading the country’s Market Accessibility Level and joining the FTSE WGBI next year at the earliest.
FTSE Russell is scheduled to announce its semi-annual Fixed Income Country Classification in March and September 2023 and decide Korea’s Market Accessibility Level and the inclusion in the FTSE WGBI based on the assessment of Korea’s new initiatives. If FTSE Russell finally decides to upgrade the Market Accessibility Level and give its approval for the inclusion of KTBs in the FTSE WGBI, it will also announce when to actually introduce KTBs in the FTSE index and a period for adjustment of the country’s weighting in the index[1].
KTBs’ weighting in the FTSE index is currently estimated to be in the range of 2.0 to 2.5 percent, the ninth largest among government bonds included in the index.
Anticipated benefits
The FTSE WGBI is the world’s largest bond index that contains government bonds of 23 major countries[2] with an estimated 2.5 trillion dollars in tracking funds.
According to a report by the Korea Institute of Finance in 2020, Korea’s joining the FTSE WGBI is projected to create 50-60 trillion won in foreign investment into the KTB market and reduce annual interest cost for KTBs by about 500 billion to 1.1 trillion won by lowering yields on bond issuance. It would contribute to improving the country’s fiscal soundness, and a stable increase in demand for KTBs would result in the enhancement of the KTB and FX market stability.
Future plans
Deputy Prime Minister Kyungho CHOO welcomed FTSE Russell’s decision to include KTBs on the WGBI Watch List and mentioned that this decision affirms that the KTB market is recognized as one of the world’s advanced government bond markets and serves as a great momentum to solve problems related to KTB devaluation and advance the KTB market.
The government will press ahead for improving the bond market system by increasing KTB market accessibility for international investors and actively communicate with market participants. Moreover, it will work closely with FTSE Russell to achieve Korea’s inclusion in the FTSE WGBI next year.
[1] It commonly takes some time for a new government bond to be actually included in the FTSE index after the decision to be included in the index. Regarding weightings in the index, once a government bond’s final inclusion weighting exceeds 1 percent, FTSE Russell gradually increases it over several months.
[2] Except for Korea and India, the top 10 countries by nominal gross domestic product (GDP) are included in the FTSE WGBI (China was included in the index in November 2021).
Please refer to the attached pdf.
