[MSCI Seonjin Index Agent] ① Slipping Due to Choi Soon-sil Gate and Overturned by Ra Deok-yeon Gate

June MSCI 'Watchlist Reinstatement' Attempt Expected to Fail Again
Institutional Improvements Insufficient, Corruption Holds Back... Difficult Outlook for Next Year
Government's 2025 Capital Market Advancement Goal at Risk of Being Undermined

The path to inclusion in the Morgan Stanley Capital International (MSCI) Developed Markets Index, a 30-year aspiration of the Korean stock market, remains long and arduous. Although the government made efforts this June to be listed on the MSCI Developed Markets watch list?the first gateway to the developed index?to resolve the undervaluation of the Korean stock market (Korea Discount), it still falls short in many areas. In particular, the stock price crash triggered by Soci?t? G?n?rale (SG) Securities, caused by unfair trading practices labeled as 'stock price manipulation,' has damaged the external standing of the capital market. Moreover, the full resumption of short selling has become uncertain, making the prospect of watch list inclusion next year virtually remote.

Reinclusion on the Watch List Also Unlikely

According to the financial investment industry on the 24th, Korea’s reinclusion on the MSCI watch list, scheduled for review next month, has effectively been canceled. The government’s goal to be listed on the watch list this year, promoted to the developed index around June next year, and fully included from June 2025 to achieve capital market advancement, has been halted at the first hurdle and has fallen through.

The MSCI index is one of the global stock market benchmark indices developed by the US mega investment bank Morgan Stanley. Alongside the Financial Times Stock Exchange (FTSE) index, published by FTSE International Limited, jointly established by the UK’s Financial Times and the London Stock Exchange, it serves as a representative benchmark for international financial fund investments. The MSCI index is broadly divided into MSCI DM (Developed Markets), MSCI EM (Emerging Markets), Frontier Markets, and Single Markets.

Korea has remained in the MSCI Emerging Markets index since its first inclusion in January 1992. In 2008, it was listed as a watch list country for promotion to the MSCI Developed Markets index, raising expectations for inclusion, but repeated failures occurred due to insufficient institutional improvements pointed out by MSCI. In 2014, Korea was even excluded from the watch list altogether. The so-called 'Choi Soon-sil Gate' corruption scandal dealt a direct blow.

In 2015, the Financial Services Commission announced it would again pursue inclusion in the MSCI Developed Markets index. Since then, some institutional improvements have been made, such as introducing integrated foreigner accounts and extending foreign exchange market hours, but reinclusion on the watch list repeatedly failed. In November 2021, the Ministry of Economy and Finance officially reaffirmed its push for MSCI Developed Markets inclusion, and then-Deputy Prime Minister Hong Nam-ki requested watch list inclusion during a meeting with MSCI, but to no avail. As of the end of last year, 23 countries, including the US, UK, and Switzerland, are listed on the MSCI Developed Markets index. In Asia, Hong Kong, Japan, and Singapore are included. The Emerging Markets index includes 26 countries, including Korea.

Insufficient MSCI Improvements Make Inclusion Failure Predictable

Korea has been challenging MSCI watch list inclusion for nine years. Lee Kyung-min, a researcher at Daishin Securities, said, "Since Korea was excluded from the MSCI Developed Markets watch list in 2014, the annual market accessibility evaluation results show that except for 'foreign investment capacity,' none of the MSCI-identified issues have improved," adding, "Given the lack of improvements, repeated failures to be listed were virtually predictable." Last year, Korea was criticized in six areas in the MSCI market classification: ▲foreign exchange market liberalization level ▲investor registration and account opening ▲information flow ▲clearing and settlement ▲transferability ▲availability of investment products.

The government is working on reforms. These include ▲foreign exchange market liberalization?direct participation of foreign financial institutions, extended trading hours ▲investor registration and account opening?abolition of foreigner registration system ▲information flow?gradual expansion of English disclosures, dividend procedure improvements ▲clearing and settlement?abolition of integrated account reporting obligations ▲transferability?relaxation of regulations on foreigner over-the-counter transactions.

By accepting MSCI’s demands such as opening offshore non-deliverable forwards (NDF), abolishing the foreign investor registration system, and using Korean index products, the government has consecutively announced improvements in foreign investment systems, dividend procedure modernization, and foreign exchange system reforms. However, market experts predict that watch list inclusion will again end in failure this year.

Although the government is showing efforts, evaluations remain unfavorable. MSCI Chairman Fernandez, who visited Korea last year, stated, "The previous (Moon Jae-in) administration began discussions on MSCI Developed Markets inclusion, and the current government is also focused on this," but added, "However, so far, no meaningful measures have been seen," expressing a negative view.

Heo Yul, a researcher at NH Investment & Securities, forecasted, "Since MSCI is a conservative institution, it verifies whether the market has actually improved through government policies before proceeding, so it will be difficult to meet market accessibility criteria in the June evaluation, making watch list inclusion unlikely." Kim Dong-young, a researcher at Samsung Securities, also pointed out, "MSCI has shown a conservative approach by only proceeding with promotion when institutional improvements are irreversibly confirmed. Therefore, they do not include countries on the watch list based solely on planned or proposed reforms."

Adding insult to injury, the domestic capital market is currently suffering from the so-called 'Ra Deok-yeon Gate.' As the perception that Korea’s chronic economic problem of corruption persists spreads to international markets, the environment is unfavorable. A financial investment industry official explained, "The Choi Soon-sil Gate significantly influenced Korea’s exclusion from the watch list in 2014," adding, "With the capital market in turmoil due to the Ra Deok-yeon Gate, the full resumption of short selling will become even more difficult, and the external standing of the domestic capital market will decline, leading to another failure in the watch list challenge."

It is also burdensome that FTSE’s evaluation of the Korean market, where Korea is already included in the developed index, is deteriorating. As of last year, FTSE’s evaluation of the Korean market rated restrictions in categories such as foreign ownership regulations, foreign exchange market, short selling, over-the-counter trading, trading systems, settlement, and custody levels.

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