South Korea's Potential $60 Billion Inflows Await World Government Bond Index Inclusion

Key Takeaway

• South Korea's expected inclusion in the World Government Bond Index could attract up to $60 billion in foreign investment.
• Euroclear and Clearstream's opening to Korean sovereign securities in June is pivotal for index eligibility.
• Recent financial reforms, including access to the interbank currency market and extended trading hours, enhance South Korea's appeal to global investors.

Anticipated Bond Index Inclusion

South Korea is on the verge of a significant financial milestone, with expectations mounting for its inclusion in the World Government Bond Index (WGBI) managed by FTSE Russell. This potential development follows reports that Euroclear Bank SA and Clearstream will open Korean sovereign securities to foreign investors starting June. Goldman Sachs Group Inc. analysts, led by Danny Suwanapruti, have highlighted this move as a critical step towards resolving the primary issue that has so far hindered South Korea's entry into the prestigious index. The anticipation builds on the back of South Korea's proactive measures to attract foreign investment, including recent permissions for global investors to access the local interbank currency market and plans to extend trading hours for the domestic won market.

Efforts to Woo Foreign Capital

Since being placed on FTSE Russell's watch list in September 2022, South Korea has intensified its efforts to meet the criteria for WGBI inclusion. Among these initiatives is the decision to allow some international investors to participate in the local interbank currency market, a move aimed at enhancing the attractiveness of South Korean government debt to foreign capital. Additionally, the country is experimenting with extended trading hours for the won market, with an official extension scheduled for July. These steps, according to Goldman Sachs analysts, are advantageous but not strictly necessary for index inclusion, noting that other markets with limited liquid extended trading hours, like China and Malaysia, have managed without them.

Potential Inflows from Index Inclusion

The inclusion of South Korea in the WGBI could have substantial financial implications, with Goldman Sachs analysts estimating potential inflows of up to $60 billion. This influx of capital would not only underscore the international investment community's confidence in South Korea's government debt market but also mark a significant achievement in the country's ongoing efforts to enhance its financial market's accessibility and attractiveness to foreign investors. The potential for such inflows highlights the importance of the measures South Korea has taken to align its market practices with global standards.

Street Views

• Danny Suwanapruti, Goldman Sachs (Bullish on South Korea's bond market):

  "Local media reports that Euroclear Bank SA and Clearstream will allow foreign investors to trade Korean sovereign securities from June suggest that the most important remaining key issue for the nation’s inclusion into the World Government Bond Index run by FTSE Russell should be resolved... If FTSE includes Korea in its bond index at the next review in September, the move may lead to as much as $60 billion worth of inflows."