MSCI keeps South Korea as emerging market, delays Indonesia review amid downgrade risk
SEOUL, SOUTH KOREA – 09 DECEMBER: People walk past the Korea Exchange (KRX) building, as stock markets in Asia as a whole have been affected by the intensifying political turmoil over president Yoon Suk Yeol’s role in martial law, in Seoul, South Korea, on 9 December, 2024. The Korea Composite Stock Price Index (KOSPI), Hong Kong’s Heng Sang, the Shanghai Composite index, as well as stocks in countries such as Australia, China, India and Thailand have seen a decline in their respective index amid the political crisis in South Korea and Syria. (Photo by Daniel Ceng/Anadolu via Getty Images)
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Index provider MSCI kept South Korea classified as an “emerging market” in its most recent review on Tuesday, while extending its assessment of Indonesia’s status until November.
The decision dashed hopes that Seoul could be included in MSCI’s Developed Markets watchlist, a crucial step before a market can be upgraded to developed-market status.
For Indonesia, the extended review comes after MSCI raised concerns about market accessibility earlier this year and froze the country’s stocks from its indexes in January, citing investability concerns.
MSCI said that it would continue evaluating reforms introduced by Indonesian authorities, but should these measures prove insufficient, the index provider would “consider a range of options for the appropriate treatment for the Indonesia market,” including a potential downgrade to frontier-market status.
Following the review, Indonesia’s financial regulator reportedly said that it would “ensure that the reforms that have been and are currently being rolled out can be comprehensively understood by the global investment community.”
Korea discount
In South Korea’s case, MSCI said limited convertibility of the Korean won in the offshore currency markets remained a key barrier to reclassification.
The index provider also cited a rigid investor identification system, restrictions on in-kind transfers and off-exchange transactions, and limits on investment products due to restrictions governing the use of exchange data.
While MSCI acknowledged measures announced by South Korean authorities to address those concerns, it said “investors have communicated that the underlying issues have not been fully resolved.”
The country is preparing to launch 24-hour trading in the dollar-won spot market on July 6, the latest step to open up its foreign exchange market to overseas investors.
Seoul has long sought inclusion in MSCI’s Developed Markets category. Analysts previously told CNBC that an upgrade could help resolve the so-called “Korea discount,” a term used to describe the lower valuations often assigned to South Korean stocks compared with global peers.
South Korea’s Finance Ministry said the country was not added to the watchlist this year because some reforms were still underway and completed measures needed more time to show results.
The ministry said it would continue pursuing foreign exchange and capital market reforms, adding that inclusion in MSCI’s developed-market index would follow if the changes continued according to South Korea’s needs and timeline.
Speaking to CNBC’s “Squawk Box Asia,” Benson Wu, chief Korea economist at Bank of America, said the decision was not unexpected, as South Korea still lacks the resources to deliver and hedge its currency.
Wu said Seoul had made clear that more reforms were coming but added that the path to developed-market status would be a “multi-year” process.
“It’s not something to be happening overnight, but I do see the chance of getting higher towards the next review.”
Source – Middle east monitor
