Hong Nam-ki: "Inclusion in WGBI Needed for Advancement of Korea's Government Bond Market"... Full-Scale Promotion Under New Administration

Inclusion of Government Bonds from 23 Countries Including the US, UK, and Japan... Global Bond Fund Investment Benchmark with the World's Top 3 Bond Indices
"Korean Government Bonds Discounted Due to Low Status... Foreign Investment Inflow and Issuance Yield Decline Expected Upon WGBI Inclusion"

[Asia Economy Washington (USA) = Reporter Kwon Haeyoung] Hong Namgi, Deputy Prime Minister and Minister of Economy and Finance, stated that "the next government should promote the inclusion of South Korea in the World Government Bond Index (WGBI), one of the world's top three bond indices, to develop the country's government bond market."

On the 21st (local time), at a press briefing with accompanying reporters covering the G20 Finance Ministers' Meeting held in Washington DC, Hong said, "Inclusion in the WGBI is expected to bring benefits such as inflow of foreign investment funds, a decline in government bond issuance interest rates, and enhancement of national status."

He explained, "Compared to the world's top 10 economies, South Korea's government bond status is relatively low, causing a discount on won-denominated bonds. In Asia, Japan, Australia, Singapore, Malaysia, and China have joined the WGBI, and the conditions for our inclusion have been sufficiently established."

The WGBI is one of the world's top three bond indices, composed of government bonds from 23 countries including the United States, the United Kingdom, and Japan. It serves as a benchmark for major global bond fund investments. Among the top 10 countries by nominal Gross Domestic Product (GDP), only South Korea and India are not included in the WGBI. Accordingly, the Ministry of Economy and Finance has been promoting inclusion in the WGBI as a mid- to long-term task, and it is reported that the next government is also considering including it as a national agenda.

However, Hong said, "It is a burden to lower tax barriers such as tax reductions for foreign investors purchasing South Korean government bonds."

Currently, South Korea meets the quantitative conditions for WGBI inclusion, such as a government bond issuance balance exceeding $50 billion and a credit rating of 'A-' or higher according to Standard & Poor's (S&P). The qualitative condition of market accessibility is the issue, and to meet this, tax benefits must be provided to foreign investors through tax law amendments. This process may cause controversy over fairness with domestic investors.

Considering the size of South Korea's government bond market, the necessity of WGBI inclusion, which is expected to lower issuance interest rates and attract foreign investment funds, is gradually increasing. Amid the COVID-19 pandemic, the government's annual government bond issuance increased from 101.7 trillion won in 2019 to 174.5 trillion won in 2020 and 180.5 trillion won in 2021, reducing the market's capacity to absorb bonds centered on domestic investors. In this situation, inclusion in the WGBI would further expand the foreign demand base and reduce the government's interest burden. Net foreign investment in government bonds is also increasing, reaching 42.5 trillion won in 2021, four times the average annual amount of 11 trillion won over the past five years.

If the new government begins preliminary consultations for WGBI inclusion in the first half of this year, South Korea could be included in the 'watch list' as early as September and potentially achieve final inclusion by September next year. According to the Korea Financial Research Institute, South Korea's weight in the WGBI is estimated to be up to 2.2%. Considering that WGBI-tracking funds amount to $2.5 trillion (approximately 3,100 trillion won), the funds tracking Korean government bonds are estimated to reach about $55 billion (approximately 68 trillion won).

Meanwhile, on the 22nd, Hong met with MSCI officials in New York to discuss the inclusion of the Korean stock market in the MSCI Developed Markets Index. Hong said, "We will review institutional improvements to resolve inconveniences for foreign investors and create a competitive market environment regarding issues related to inclusion in the Developed Markets Index, such as the foreign investor registration system and index usage rights," and requested to be listed as a watch candidate for inclusion in the Developed Markets Index in June.

This content was produced with the assistance of AI translation services.