FTSE Russell, a subsidiary of the London Stock Exchange Group that produces, maintains, licenses and markets stock indices, published the FTSE Fixed Income Country Classification Announcement and stated that South Korea will be added to the FTSE Fixed Income Country Classification Watch List for potential upgrading of its market accessibility level from 1 to 2 and consideration for inclusion in the FTSE World Government Bond Index (WGBI).
FTSE Russell has added Korea as the Korean market authorities proposed several new initiatives aimed at improving the structure and accessibility of its capital market for both domestic and international investors.
These include the proposed exemption from withholding tax applied to investors in KTB, which is currently subject to approval by the Korean National Assembly, proposed reforms to improve foreign exchange market accessibility of the Korean won, and plans to facilitate KTB trading through the International Central Securities Depositories (ICSD).
WGBI inclusion process
The announcement has increased the possibility of raising the level of accessibility of the Asian country’s market and joining the FTSE WGBI at the earliest, next year.
If FTSE Russell ultimately decides to raise the bar for market accessibility and give its approval for the inclusion of KTBs in the FTSE WGBI, it will also announce when KTBs will actually be introduced in the FTSE index and a country weighting adjustment period in the index.
KTB’s weight in the FTSE index is currently estimated to be between 2.0% and 2.5%, the ninth largest among the government bonds included in the index.
Expected Benefits
The FTSE WGBI is the world’s largest fixed income index, containing government bonds from 23 major countries, with an estimated $2.5 trillion in tracking funds.
According to a report by the Korea Institute of Finance in 2020, Korea’s accession to the FTSE WGBI is expected to generate 50 trillion won to 60 trillion won of foreign investment in the KTB market and reduce the annual interest cost of KTB by about 500,000 million by reducing the yields of the bond issue.
It would also help improve the country’s fiscal soundness, and a stable increase in demand for KTBs would improve the stability of the KTB and foreign exchange markets.
Future plans
Vice Prime Minister of Korea Kyungho Choo welcomed FTSE Russell’s decision to include KTBs on the WGBI watch list, noting that this decision affirms that the Korean market is recognized as one of the most advanced government bond markets in the world. .
The Korean government intends to continue to improve the bond market system by making the KTB market more accessible to international investors and actively communicating with market participants.
