The inclusion of Korean Government Bonds in the World Government Bond Index (WGBI) has been postponed to April next year. Due to difficulties in establishing a system for trading Korean Government Bonds in Japan, the starting point for the inclusion has been delayed by five months from the initial plan. Consequently, the expected benefits of the inclusion this year, such as inflow of funds from developed countries and reduction of costs in government bond procurement, have also been postponed.
The British index provider FTSE Russell announced on the 8th (local time) that "the inclusion of Korea in the WGBI has been confirmed," stating, "The starting point for Korea's WGBI inclusion has been changed to April next year." However, the plan is to expand the share of Korean Government Bonds monthly (eight times), maintaining the final inclusion completion point in November 2026. Previously, FTSE Russell had announced plans to start reflecting the index from November this year and expand the inclusion ratio quarterly for one year.
The WGBI is the world's largest bond index, with funds amounting to $2.5 trillion relying on this index for investment decisions. As of this year, government bonds from 25 countries, including the United States, Japan, and the United Kingdom, are included in the World Government Bond Index, and from April next year, Korean Government Bonds will also be included. Considering WGBI tracking funds, approximately 75 trillion to 90 trillion won in foreign capital is expected to flow into Korea (2.05%).
FTSE Russell noted regarding the delay in the start of the inclusion that "to ensure global investors can smoothly participate in the Korean Government Bonds market, we needed to secure a preparation period and that expanding the inclusion ratio monthly simplifies and facilitates portfolio management based on feedback from market participants." According to the Ministry of Economy and Finance, it is known that trading of Korean Government Bonds in Japan's securities trading system is not currently proceeding smoothly, leading to requests from the Japanese side.
FTSE Russell also stated that "broad support for Korea's WGBI inclusion continues across the market, and we highly appreciate that the government of Korea has created a market environment that meets global bond investment standards by incorporating the opinions of international investors."
◇ "The delay in WGBI inclusion is not due to political uncertainty"
Some pointed out that "the political uncertainty in Korea may have had an impact." However, the Ministry of Economy and Finance drew a line, saying, "The possibility that political uncertainty influenced the delay in the inclusion timing is 0%." FTSE Russell also emphasized that this adjustment in the starting point is a measure to support the smooth index inclusion of Korean Government Bonds.
A Ministry of Economy and Finance official stated, "If there had been a lack of trust in Korean Government Bonds, FTSE Russell would have canceled the inclusion itself or postponed the completion date" and added, "I confirmed during meetings with FTSE Russell officials that political issues were not a factor for consideration."
Korea is not the first case where WGBI inclusion schedules have been adjusted. Previously, when China was included in the WGBI, the period required for completion extended from the original one year to three years due to investment infrastructure issues. However, the starting point for China's WGBI inclusion (October 2021) was not adjusted at that time.
The official from the Ministry of Economy and Finance added, "As investment infrastructure was not smoothly established before China's WGBI inclusion, China could not fully enjoy the benefits of WGBI inclusion," and noted, "Currently, Japan is separately constructing an investment index excluding China for investment."
He further analyzed, "Finalizing internal procedures for investment execution and allowing sufficient testing transaction time will maximize the benefits of Korea's WGBI inclusion and help stabilize the system."
◇ The effects of WGBI inclusion are also delayed until next year
Meanwhile, there is a possibility that the capital recently inflowed from foreign sources could flow out due to the delay in WGBI inclusion. Additionally, as the inflow of investment funds is delayed, the effects of WGBI inclusion, such as inflow of funds from developed countries and reduction in government bond procurement costs, are expected to manifest only next year. Generally, when foreign capital flows into the government bond market, a drop in government bond rates and stabilization of exchange rates are expected.
For this reason, the delay in WGBI inclusion is viewed as a disappointment for the government, which is currently formalizing the push for a supplementary budget and contemplating ways to secure funding. The government is currently in a situation where issuing deficit Government Bonds is inevitable due to a large-scale revenue shortfall that has persisted for two years.
Kim Jae-hwan, the director of the international finance division of the Ministry of Economy and Finance, stated, "Since this is an adjustment rather than a cancellation of inclusion, direct impacts such as outflow of foreign capital are limited," while also noting, "Considering that a significant amount of foreign capital has recently flowed in, we will continue to take stabilization measures in the market and closely monitor the situation to respond in a timely manner."
The government plans to continuously check and improve related systems and infrastructure to allow global investors to invest in Korean Government Bonds without hindrance. Additionally, the government will strengthen communication with the market to create actual investment cases, while also promoting efforts to ensure that the WGBI inclusion leads to structural advancement not only in the Korean Government Bonds market but in the entire capital market, including liquidity expansion and improvements in the structure of foreign exchange and bond markets.