Lee Hyo-jin covers the Bank of Korea, the banking industry and broader financial news. Her previous beats include foreign affairs, North Korea and general reporting on Korean society.
Will Korea's WGBI debut bring FX stability?
A Hana Bank employee checks U.S. dollar notes at the bank's branch in central Seoul, March 5. Yonhap
By Lee Hyo-jin
Korea's inclusion in the World Government Bond Index (WGBI) took effect Wednesday, raising expectations that fresh foreign inflows could help support the weakening won.
According to financial authorities, the inclusion of Korean government bonds into the index operated by London-based FTSE Russell will be phased in over eight months through November.
The WGBI currently comprises government bonds from 25 countries, and Korea's weighting is expected to reach around 2 percent, making it the ninth-largest among members.
Inclusion in the index is expected to trigger investment from global institutional investors, including pension funds and asset managers that track the benchmark.
The Ministry of Finance and Economy said it held a kick-off meeting for a task force the same day with the Financial Services Commission, the Bank of Korea, the Financial Supervisory Service and the Korea Securities Depository to monitor WGBI-related capital inflows and promote further investment.
Koo Yun-cheol, deputy prime minister and finance minister, said the inclusion to the global index is expected to help stabilize Korea's foreign exchange and financial markets, which have faced heightened volatility amid the Middle East conflict.
"Foreign financial institutions and primary dealers of Korean Treasury bonds expect inflows of around $50 billion to $60 billion, and inflows have already been observed this week," Koo wrote on X, formerly Twitter.
The government's expectations stem from the potential for large-scale dollar inflows to support the won, as foreign investors typically convert dollars into local currency when purchasing Korean bonds.
The Korean currency has hovered around the 1,500 level against the U.S. dollar in recent trading days, pressured by foreign selling of domestic stocks amid the ongoing Iran crisis.
However, some analysts view that the impact of the WGBI inclusion may be limited as ongoing tensions in the Middle East continue to weigh on the Korean economy.
In a recent report, LS Securities said an immediate decline in bond yields or a sharp strengthening of the won is unlikely, citing rising global interest rates driven by higher oil prices and inflationary pressures.