Korea fails to land on MSCI's developed market index

Electronic sign boards at Hana Bank in central Seoul show the financial market Friday. [NEWS1]

Korea failed to make it onto the developed market index by Morgan Stanley Capital International (MSCI), despite a series of reforms announced to raise accessibility to the equity market.

The global index provider said Korea will remain on the emerging market index in its latest MSCI 2023 Market Classification Review report released Thursday.

“MSCI recognizes and welcomes the proposed measures aimed at improving the accessibility of the Korean equity market,” the report read.

But it added the reforms need to be implemented and experienced by international investors over time for the MSCI Index Policy Committee to assess their impact and effectiveness.

“Only following this period of investors experiencing the reforms in practice over time, may MSCI consult with market participants on their experiences regarding the potential reclassification of the Korean equity market from Emerging Market to Developed Market status,” the MSCI added.

The MSCI reclassifies its watch list of emerging markets and developed markets every June, based on a country’s economic development, the size and liquidity of equity trading and accessibility for foreign investors. The country needs to be on the watch list for at least a year before its status can be upgraded.

Failure to receive the developed market status has hurt Korea’s investment potential and prevented higher stock valuations.

The Ministry of Economy and Finance announced plans in February to allow foreign institutions to participate in the onshore interbank foreign exchange market upon registration, extend trading hours and implement specific enhancements in infrastructure that aim to better align with global foreign exchange markets.

They are planned to be implemented in the second half of next year following a six-month pilot period earlier in the year.

In January, the Financial Services Commission announced plans to scrap an investor registration system that was required for foreigners trading securities on the local market. English disclosures for Korean companies will be gradually required over the next two years.

But financial authorities have remained ambiguous on the full resumption of the short-selling of stocks.

Short selling was temporarily prohibited in Korea in March 2020 as the market melted down following the Covid-19 pandemic outbreak. Short selling of Kospi 200 and Kosdaq 150 index stocks was resumed in May 2021. However, short selling stocks outside of the indexes remains prohibited.

Financial Supervisory Service Gov. Lee Bok-hyun said in June that it is still too early to review the full resumption of short selling of stocks, considering uncertainties that prevail in the financial market.

BY JIN MIN-JI [jin.minji@joongang.co.kr]