MSCI Expected to Announce South Korea’s Developed Market Status

South Korea, once a struggling nation, has experienced a remarkable economic transformation since the 1960s, now ranking as the twelfth-largest economy globally. With a population of 52 million, South Koreans earn an average income of $35,000 per year, comparable to Italians and higher than Iberians. The country’s stock market ranks sixteenth in the world, with a market capitalization of $1.8 trillion and significant daily trading volumes. Despite these achievements, South Korea remains classified as an emerging market by MSCI, a market benchmark creator, a categorization that the country hopes to change. On June 22nd, MSCI is expected to announce the potential candidates for a promotion to developed market status next year.

South Korea became the thirteenth country to join MSCI’s Emerging Market Index, which currently includes 24 members. However, some countries have been downgraded to “frontier” status or removed entirely, while others, such as Greece and Portugal, have been promoted to MSCI’s Developed Market index years ago. South Korea believes it deserves a promotion and has introduced ambitious reforms to address concerns about weak shareholders’ rights, complex ownership structures, governance lapses, and market distortions caused by state interventions. These reforms aim to make South Korea’s financial markets more dynamic and attractive to international investors, potentially bringing in an estimated $46 billion to $56 billion of fresh capital.

Nevertheless, South Korea faces skepticism due to previous failed attempts at securing the upgrade. Critics argue that the latest reforms are not comprehensive enough, with certain measures being seen as half-hearted. The country’s reluctance to remove limits on foreign ownership in key industries and relax restrictions on short-selling has drawn criticism. Furthermore, political uncertainties and policy decisions that impact investors, such as the recent intervention in banks’ earnings, have added to the reservations. MSCI has hinted that South Korea may need to fully implement the capital-market reforms and assess investor reactions before considering its inclusion in the elite developed market index.

While the promotion to developed market status holds potential benefits for South Korea, caution is advised. Experts warn against rushing into an upgrade, emphasizing the vulnerability of an export-dependent economy to hasty market liberalization. Additionally, the anticipated capital inflows, while significant, are relatively small compared to the size of South Korea’s markets and would primarily benefit large companies. Previous examples, such as Israel’s experience after its promotion, demonstrate that capital inflows can be reversed. Therefore, achieving membership in prestigious market indices alone will not solve South Korea’s reputational challenges. The success of the reforms lies in their ability to gain wider public trust and address longstanding concerns.