Korea’s inclusion in the FTSE Russell bond index supported local markets By Reuters

By Cynthia Kim and Yena Park

SEOUL (Reuters) – The surprise inclusion of South Korean sovereign bonds in the benchmark Russell bond index is expected to give the currency a boost on Thursday and attract billions of dollars in inflows over the next few years.

South Korea’s government estimated that inclusion in the global government bond index could raise up to 80 trillion won ($59.7 billion) in its $2.2 trillion bond market, a welcome source of funds for the world’s fastest-aging country, as welfare costs appear to be. wave.

The inflows are also expected to provide a boost for the won, which is down 4 percent against the dollar this year and a falling stock market, analysts said.

Financial markets in Korea are closed on Wednesday for a public holiday, so they are expected to react on Thursday.

“For Korea, the inclusion means a steady and stable source of cash inflows and signals that the ‘Korea discount’ may be reduced,” said Kim Han-soo, an analyst at the Korea Capital Market Institute.

The downgrade in Korea refers to a tendency for South Korean companies to have weaker valuations than global peers because of red tape, low dividend payouts and the dominance of opaque conglomerates known as chaebols.

“Korea’s single and narrow foreign exchange market has always been a problem, but the accession means that global investors now approve of the system,” Kim said, referring to South Korea’s efforts to increase the participation of foreign banks in foreign exchange markets.

FTSE Russell’s decision follows broader reforms by Chairman Yoon Suk Yeol to remove the Korea discount and boost inflows by including the country in top indices such as WGBI and MSCI’s developed market benchmarks.

Among the reforms South Korea has adopted to boost foreign access to financial markets is the launch of an omnibus account for Korean treasury bonds with securities settlement house Euroclear, which allows overdrafts in won through the Central Depository International Securities and extended trading hours to win.

Despite those efforts, earnings have lost ground this year and while down 2.3 percent, underperforming strong earnings from his and his.

Seoul’s reform efforts have also been overshadowed by the government’s reimposition of a blanket ban on short selling of stocks last year, prompting index provider MSCI Inc (NYSE: ). in June to retain South Korea’s emerging market classification.

Goldman Sachs and Morgan Stanley recently said Korea’s addition to the FTSE Russell index could be delayed until next year due to a lack of significant global bond settlement volumes using Euroclear.

“It’s a surprise decision and we see temporary dollar selling offshore. There will be more demand for earnings-driven assets,” said one FX dealer, who asked not to be named because of domestic politics.

Asked to comment on the index provider’s decision, South Korea’s Finance Ministry director Kwak Sang-hyun said Seoul’s submission to FTSE Russell was made based on expectations that Euroclear settlements would resume once Korea is added to the index.

“The listing will help new investors settle bonds through Euroclear. The decision is a vote of confidence from global investors, and the inflows will allow Korea to have more fiscal policy space even as government debt rises,” Kwak said.

South Korean government bonds are expected to comprise 2.22% of the debt benchmark and will be added to the index starting in November 2025, which will be phased in over a one-year period on a quarterly basis.

(1 USD = 1,340.7000 Won)