Key Takeaways
- • South Korea's Deputy Prime Minister and Minister of Economy and Finance Lee Hyoung-il asked Bloomberg's Asia-Pacific representative Bing Li on October 28 to reclassify Korean government bonds from emerging to developed market status in the Bloomberg Global Aggregate Bond Index.
- • A developed-market reclassification could draw roughly 4 trillion won (about $3.0 billion) in additional inflows, with Norway's Government Pension Fund Global (GPFG) cited as the main potential buyer.
- • Bloomberg's regular country classification review is due early next year, and it kept South Korea in emerging-market status in April after reviewing it alongside Israel, Taiwan and the Czech Republic.
- • Analysts caution the uplift may be smaller than the WGBI inclusion effect, since Korean bonds are already in the Bloomberg index.
Summary
South Korea's government has opened talks with Bloomberg seeking to have its government bonds reclassified from emerging to developed market status in the Bloomberg Global Aggregate Bond Index. On October 28, Deputy Prime Minister Lee Hyoung-il met Bing Li, Bloomberg's Asia-Pacific representative, citing South Korea's qualification as a developed, high-income country under IMF and World Bank criteria and improved foreign market access since its inclusion in the World Government Bond Index (WGBI) in April. Lee asked Bloomberg to review whether its country classification is consistent and to reflect these developments in the upcoming review. Bing Li agreed on the importance of continued communication and said Bloomberg would keep working to deepen global investors' understanding of Korean markets.
Bloomberg is due to conduct its regular review early next year. According to the report, a developed-market upgrade could draw roughly 4 trillion won (approximately $3.0 billion) in additional inflows from investors that have restricted emerging-market bond exposure, notably Norway's sovereign wealth fund. GPFG excluded emerging-market bonds from its benchmark in 2019, causing its Korean government bond holdings to fall from 49 billion kroner at end-2019 to zero at end-2024. Holdings then returned to 15.1 billion kroner (roughly 2.3 trillion to 2.4 trillion won, or about $1.7 billion to $1.8 billion) in the first half of this year. Conversions vary by report.
Bloomberg kept South Korea, the Czech Republic, Israel and Taiwan in emerging-market classification in April after reviewing them following feedback from market participants, while acknowledging all four meet high-income or advanced-economy criteria under World Bank and IMF standards. Officials and market watchers cite South Korea's strong growth this year and its credit ratings and yield profile as supporting the case.
Not all observers expect a large effect. Hwang Se-woon, a senior research fellow at the Korea Capital Market Institute, said additional foreign inflows were likely to rise but that the impact may be less clear-cut than the WGBI inclusion, since the bonds' developed-market status is already widely recognized. A Ministry of Economy and Finance official similarly said the scale of additional inflows is difficult to estimate because the bonds are already in the existing index.
According to a February report from State Street, the yield-to-worst of the Bloomberg Emerging Market Local Currency Government Bond Index was 5.91% at the end of January, 0.16 percentage points below the JPMorgan Emerging Market Bond Index (6.07%), which State Street attributed partly to the inclusion of AA-rated South Korea and A-rated Israel. South Korean government bonds make up 9.66% of Bloomberg's Emerging Market Local Currency Liquid Government Bond Index, second only to China at 10.02%.
Bloomberg is due to conduct its regular review early next year. According to the report, a developed-market upgrade could draw roughly 4 trillion won (approximately $3.0 billion) in additional inflows from investors that have restricted emerging-market bond exposure, notably Norway's sovereign wealth fund. GPFG excluded emerging-market bonds from its benchmark in 2019, causing its Korean government bond holdings to fall from 49 billion kroner at end-2019 to zero at end-2024. Holdings then returned to 15.1 billion kroner (roughly 2.3 trillion to 2.4 trillion won, or about $1.7 billion to $1.8 billion) in the first half of this year. Conversions vary by report.
Bloomberg kept South Korea, the Czech Republic, Israel and Taiwan in emerging-market classification in April after reviewing them following feedback from market participants, while acknowledging all four meet high-income or advanced-economy criteria under World Bank and IMF standards. Officials and market watchers cite South Korea's strong growth this year and its credit ratings and yield profile as supporting the case.
Not all observers expect a large effect. Hwang Se-woon, a senior research fellow at the Korea Capital Market Institute, said additional foreign inflows were likely to rise but that the impact may be less clear-cut than the WGBI inclusion, since the bonds' developed-market status is already widely recognized. A Ministry of Economy and Finance official similarly said the scale of additional inflows is difficult to estimate because the bonds are already in the existing index.
According to a February report from State Street, the yield-to-worst of the Bloomberg Emerging Market Local Currency Government Bond Index was 5.91% at the end of January, 0.16 percentage points below the JPMorgan Emerging Market Bond Index (6.07%), which State Street attributed partly to the inclusion of AA-rated South Korea and A-rated Israel. South Korean government bonds make up 9.66% of Bloomberg's Emerging Market Local Currency Liquid Government Bond Index, second only to China at 10.02%.
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