MSCI has maintained South Korea’s classification as an “emerging market” despite Seoul’s reform efforts, citing persistent issues with currency convertibility and investor access. Concurrently, Indonesia’s market status review has been extended until November, with MSCI warning of a potential downgrade to frontier-market status if ongoing reforms prove insufficient.
Global index provider MSCI has announced its latest market classification review results, confirming South Korea's ongoing status as an "emerging market." This decision comes as a setback for Seoul, which has actively pursued reforms in hopes of achieving developed-market status. Concurrently, MSCI has extended its review of Indonesia's market, warning of a potential downgrade to frontier-market status if crucial market accessibility reforms are not fully realized.
South Korea's aspirations for an upgrade to MSCI's Developed Markets watchlist were thwarted primarily due to persistent issues surrounding the limited convertibility of the Korean won in offshore currency markets. MSCI also highlighted a rigid investor identification system, restrictions on in-kind transfers and off-exchange transactions, and limitations on investment products stemming from exchange data regulations. While South Korean authorities have initiated measures to address these concerns, MSCI indicated that investors believe the fundamental issues remain unresolved.
Seoul has been proactive in its reform efforts, including plans to launch 24-hour trading in the dollar-won spot market on July 6. An upgrade to developed-market status is seen as a crucial step to alleviate the so-called "Korea discount," a term describing the typically lower valuations of South Korean stocks compared to their international counterparts. The country's Finance Ministry acknowledged that some reforms are still underway and need more time to yield tangible results, reaffirming its commitment to further foreign exchange and capital market reforms.
For Indonesia, the extended review period will last until November. MSCI previously raised concerns about market accessibility and had frozen the country's stocks from its indexes earlier this year due to investability issues. The index provider stated it would continue to evaluate reforms by Indonesian authorities, but cautioned that insufficient progress could lead to a range of options, including a potential downgrade to frontier-market status. In response, Indonesia's financial regulator has reportedly vowed to ensure that its reforms are clearly understood by the global investment community.
Benson Wu, chief Korea economist at Bank of America, commented that MSCI's decision regarding South Korea was not unexpected, citing the country's continued lack of resources for currency delivery and hedging. Wu noted that while Seoul has committed to further reforms, achieving developed-market status is likely a "multi-year" process, though he foresees an increased likelihood of an upgrade in future reviews.
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