Inclusion of South Korean Bonds in FTSE Russell's Index

By Cynthia Kim and Yena Park

SEOUL (Reuters) – The surprise inclusion of South Korean sovereign bonds in the FTSE Russell's benchmark bond index is set to boost the won currency and attract billions in inflows.

The South Korean government projects that this inclusion could draw as much as 80 trillion won ($59.7 billion) into its $2.2 trillion bond market, providing much-needed funds for the world’s fastest-aging country.

Analysts expect these inflows to bolster the won, which has declined 4% against the dollar this year alongside a slumping stock market.

Korean financial markets are closed on Wednesday for a public holiday, so the reaction is anticipated on Thursday.

Kim Han-soo, an analyst at the Korea Capital Market Institute, stated, “For Korea, the inclusion means a steady source of money inflows and signals that the 'Korea discount' could be eased.” The Korea discount refers to the tendency for South Korean companies to be valued lower than global peers due to various factors including bureaucratic red tape and conglomerate dominance.

Kim further noted that the inclusion indicates global investors' approval of South Korea's unique foreign exchange market.

This decision by FTSE Russell follows President Yoon Suk Yeol's reforms aimed at removing the Korea discount and enhancing foreign investments through inclusion in top indices like the WGBI and MSCI.

Reforms to increase foreign market access include:
– Launching an omnibus account for Korean treasury bonds with Euroclear
– Allowing overdrafts in won via International Central Securities Depository
– Extending onshore trading hours for the won

Despite reform efforts, the won has struggled this year, with the KOSPI down 2.3%, lagging behind the gains of the S&P 500 and Nikkei.

Seoul's reforms face challenges, including last year’s reinstatement of a ban on stock short-selling, leading MSCI Inc to keep South Korea classified as an emerging market.

Goldman Sachs and Morgan Stanley indicated that Korea’s FTSE Russell index addition might be delayed to next year due to insufficient global bond settlement volumes via Euroclear.

An FX dealer commented on the decision as unexpected, leading to initial dollar selling and increased demand for won-based assets.

Kwak Sang-hyun from South Korea's finance ministry expressed optimism regarding Euroclear settlements improving post-inclusion, saying, “This decision reflects global investors' confidence. The inflows will provide Korea with more fiscal policy flexibility even with rising government debt.”

South Korean government bonds are projected to account for 2.22% of the debt gauge, with the addition to the index starting November 2025, phased in quarterly over a year.

(Note: $1 = 1,340.7000 won)