(Bloomberg) — South Korea is “positively expecting” the country’s bonds to be included in a key global debt index next month, a senior government official says, even as some major banks say it’s unlikely to happen this time around.
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The nation has put necessary systems in place since being added to a watchlist for potential inclusion in FTSE Russell’s World Government Bond Index two years ago, and is ready to make additional adjustments based on investor feedback, Vice Finance Minister Kim Beom-seok said in an interview in Hong Kong.
Kim made the comments as he and his team make a final pitch to investors before the Oct. 8 decision, meeting about 10 global banks over two days.
Goldman Sachs Group Inc. has predicted Korean bonds will only be added to the FTSE index in 2025, citing procedural issues raised by investors, while market participants at Nomura Holdings Inc, abrdn plc and Manulife have also flagged the risk of a delay.
Their projections clash with Korean policymakers’ optimism that efforts to reform the capital market, including an extension of currency-trading hours and a deal with Euroclear Bank SA to open an omnibus account, will help sway the Oct. 8 announcement.
The “actual take-up of investors settling on Euroclear has been fairly light as investors have to acquire a tax waiver” from the authorities, Goldman analysts wrote in a report this month.
Kim said the government doesn’t require a waiver or approval for tax exemption on Euroclear trades, and investor demand is likely to to improve following any WGBI inclusion.
There were just 26 buying and selling transaction of Korean bonds by offshore traders through Euroclear from July 1 to Aug. 28, according to numbers provided by the ministry. There were also 3,455 trades using Korean debt as collateral.
“There are some concerns with the low utilization from investors to settle via Euroclear that could see the FTSE take a more cautious approach,” said Murray Collis, fixed-income chief investment officer for Asia ex Japan at Manulife Investment Management. Fundamentally however, “Korean authorities have taken all the right steps to improve market accessibility,” he said.
Korea has been pushing for inclusion in the FTSE index as part of broader efforts to woo global investors and upgrade its capital market. Despite being Asia’s fourth-largest economy, Korea has been seen as lacking appeal due to limited onshore currency trading hours and a cumbersome investor-registration process. The government has addressed both issues in recent years.
In March, FTSE Russell kept Korea on the WGBI watchlist, while acknowledging “meaningful progress” in improving market accessibility. The country is also seeking to get an upgrade to developed-market status by MSCI Inc. for its equities.
Kim said the government is willing to make the won tradeable 24 hours if there’s investor demand, while noting that the increase of trading hours in July drew only limited liquidity for the after-hours session.
“It’s a bit difficult to say there’s meaningful pricing and trading going on there, so we can’t say when we will start around-the-clock trading,” he said.
Bloomberg LP, the parent company of Bloomberg News, also offers index products for various asset classes through Bloomberg Index Services Ltd.
In other key comments from the interview, Kim said:
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Conditions are set for the Bank of Korea to cut interest rates, as the central bank governor has said
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On concerns over the impact on property markets, the government has macro-prudential measures and is constantly communicating with the BOK
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The government is taking a long-term view on the corporate value-up program to boost share-holder returns, and is mostly focusing on offering incentives rather than penalties for now
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On improving corporate governance, discussions to revise the commercial law are underway
–With assistance from Catherine Bosley, Youkyung Lee, Daedo Kim, Kevin Dharmawan, Ronojoy Mazumdar and Giulia Morpurgo.
(Updates with investor reactions from fourth paragraph)
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