Index provider MSCI has announced its latest market classification review, maintaining South Korea's status as an emerging market and extending the review period for Indonesia's classification until November of this year.
This decision dashes South Korea's hopes of being placed on MSCI's watchlist for developed markets, a critical preliminary step for an economy's potential upgrade to developed market status.
The postponement of Indonesia's review stems from earlier concerns raised by MSCI regarding market accessibility. In January, Indonesian stocks were temporarily excluded from certain MSCI indices due to issues with investment convenience.
MSCI stated it will continue to monitor reform measures implemented by Indonesian regulators. Should these reforms prove insufficient, the index provider will "consider a range of reasonable options for the treatment of Indonesia's market classification," which includes a potential downgrade to frontier market status.
Following the announcement, Indonesia's financial regulatory authority responded, pledging to ensure that both implemented and ongoing reforms are fully communicated and understood by the global investment community.
Key Obstacles for South Korea's Upgrade
In its assessment of South Korea, MSCI identified the limited convertibility of the Korean won in the offshore foreign exchange market as the primary obstacle to a classification upgrade.
Additional major constraints include a restrictive investor identification system, limitations on the transfer of physical assets and over-the-counter transactions, and investment product restrictions stemming from exchange data usage rules.
While MSCI acknowledged policy efforts by Korean regulators to address these issues, it noted that "global investors have indicated that the underlying problems have not been fully resolved."
South Korea plans to launch 24-hour trading for the USD/KRW spot market on July 6, marking its latest initiative to open its foreign exchange market to overseas investors.
The country has long sought developed market status from MSCI. Analysts have previously suggested that an upgrade could help alleviate the so-called "Korea discount," where the country's stock market has historically traded at lower valuations compared to global peers.
South Korea's Ministry of Finance responded to the decision, stating that the failure to be placed on the developed market watchlist was due to some reforms still being in progress and the need for time for implemented policies to take effect. The ministry affirmed that South Korea will continue to advance foreign exchange and capital market reforms, expressing confidence that if reforms proceed as planned, there remains a future opportunity for inclusion in MSCI's developed market indices.
The chief Korea economist at Bank of America noted on a financial program that the review outcome was widely anticipated by the market, as South Korea still lacks a comprehensive system for currency delivery and exchange rate hedging.
He added that while South Korea has committed to further reforms, achieving developed market status is a multi-year process that cannot be accomplished quickly. However, the probability of an upgrade in the next review cycle is expected to increase.
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