Will Korea succeed in joining World Government Bond Index?

Finance Minister Hong Nam-ki speaks at a meeting with reporters during his visit to Washington D.C. on April 21. Courtesy of the Ministry of Economy and Finance

Gov't aims to join benchmark global bond index to raise credibility of won-denominated debt

By Anna J. Park

The Korean government seeks to join the World Government Bond Index (WGBI) operated by FTSE Russell, a move seen as a way to raise the credibility of Korean won-denominated sovereign bonds on the global market and attract more foreign capital into the country.

The WGBI is a broad index designed to measure the performances of sovereign fixed income markets, such as local currencies and investment-grade sovereign bonds of 23 advanced countries, including the U.S., U.K. Japan and Germany. The index is a benchmark for global financial institutions' bond investments, with a whopping $2.4 trillion or some 3,031 trillion won worth of global money tracking it.

This is according to Finance Minister Hong Nam-ki's recent comments, as he spoke to reporters during his visit to the U.S. to attend a G20 meeting.

“Given that the Korean economy is one of the world's 10 largest economies, I think the conditions are now ripe for the country to join the WGBI,” the minister told the reporters at a meeting in Washington D.C. last week.

“Considering the size of the economy and the mature government bond market as well as capital flows of foreign currency funds, Korea's inclusion into the index is very much needed,” Hong said, adding that the incoming administration is examining the issue as one of the key government tasks.

Among the world's 10 highest nominal GDP countries as of the end of last year, only Korea and India have yet to be included in the index. China made it onto the index back in 2020. The government pushed for the inclusion in 2009, yet couldn't make it then.

“Despite Korea's solid economic power and high credibility of its bonds, there exists a discount for won-denominated bonds. As the country is not yet included in the WGBI, the Korean bond's interest rates tend to go higher, meaning its price decreases,” minister Hong explained.

One of the basic requirements for inclusion into the WGBI is that a country receives a sovereign credit rating of over A- level by S&P. On Tuesday, S&P maintained its AA rating for Korea with a stable outlook, which is more than four ranks higher than the requirement.

Another requirement for being included in the WGBI is to have a bond market size of at least $50 billion. The size of Korea's sovereign debt market stood at $675 billion as of the end of last year, which is well over 10 times the requirement.

If the new government launches a consultation for the inclusion into the benchmark index at some point during the first half of this year, Korea could be included as early as September next year. Korean bonds' weight could account for up to 2.2 percent of the index, if the inclusion takes place.

Experts say if Korea is included in the WGBI, about 60 trillion won ($47 billion) worth of global funds' money could flow into the local bond market, with the decrease in won-denominated bonds' interest rates.

“When Korean sovereign bonds are included in the WGBI, global money worth between $46.3 billion and $50.5 billion is estimated to flow into the won-denominated bond market,” Lim Jae-kyun, analyst at KB Securities, said.

“Given that the money influx takes place over 18 to 24 months, the monthly capital inflow would be around $2 or $2.9 billion,” the analyst explained, adding that the inclusion could cause a total interest rate decrease of 60 basis points (bp).

However, there are some problems that need to be addressed for Korea to be included in the index. Foreign investors' tax issues should first be negotiated at the consultations, market watchers say.

It is likely that the index operator will ask the Korean government to provide tax exemptions for overseas bond investors. Unstable global bond market conditions should also be taken into account, as the inclusion into the index during the market's volatile periods could only make the Korean fixed income market more vulnerable.