[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.
