South Korea Again Fails to Win MSCI Developed-Market Status as Offshore Won Curbs Remain

South Korea’s stock market has once again been left out of MSCI’s developed-market index. Access for foreign investors has improved, but restrictions on offshore won trading remain a key hurdle, the Financial Times reported.

MSCI kept South Korea in its emerging-markets category in last month’s annual market accessibility review, according to the FT report published July 10. The index provider said conditions for foreign investors were improving, but cited the ban on offshore won trading and differences in short-selling rules as key distinctions from developed markets.

The delay in opening the foreign-exchange market reflects a policy stance rooted in the 1997 financial crisis, market participants told the FT. After the won plunged and foreign-exchange reserves were depleted, the government maintained limits on trading hours and required domestic settlement, putting currency-market stability first.

Hwang Se-woon, a research fellow at the Korea Capital Market Institute, told the FT that policymakers remain influenced by their experience during the crisis. Concerns linger that opening an offshore won market could expand the influence of foreign capital. The Lee Jae-myung government is also pursuing MSCI developed-market status, but remains cautious about fully liberalizing the foreign-exchange market.

The government has pushed reforms including omnibus accounts and extended won trading hours, but offshore won trading is still not permitted. MSCI said the key issue is whether international investors can access liquidity and trading conditions consistent with developed-market standards.

MSCI developed-market inclusion could help attract long-term passive inflows and narrow the Korea discount. BNP Paribas estimates that about $30 billion of passive funds could flow into South Korean stocks if the market joins the MSCI developed-market index.

Still, the benefits may be overstated. NH Investment & Securities said South Korea currently carries a large weighting in the MSCI Emerging Markets Index, but that share could drop sharply after a move to the developed-market gauge. That could trigger outflows from small- and mid-cap stocks and deepen concentration in large caps.