In a Dilemma

The Korean financial authorities are in a dilemma with a decision on whether South Korea is to join the MSCI World Index or not scheduled to be made in a month.
The Korean financial authorities are in a dilemma with a decision on whether South Korea is to join the MSCI World Index or not scheduled to be made in a month.

 

The South Korean financial authorities are in a dilemma with a decision on whether South Korea is to join the MSCI World Index or not scheduled to be made in a month. The incorporation can have a positive effect in terms of foreign investment attraction but the relaxation of foreign exchange trading regulations to that end can affect the stability of the South Korean currency.

At present, the indices of the IMF, FTSE and S&P regard South Korea as a developed economy whereas MSCI sees it as an emerging economy. South Korea put itself on MSCI’s review list in 2008 but failed to join the MSCI World Index due to the stiffness of its foreign investor registration system and the shortage of exchangeability of its currency. It failed to join the review list to boot in 2014.

Under the circumstances, the South Korean financial authorities had a meeting on May 15 this year and decided to overhaul the foreign investor registration system for the first time in 24 years. In this context, the omnibus accounts for foreign investors become available from late this month. MSCI Chairman Henry Fernandez expressed a positive opinion about the accounts during his visit to the country early this year.

Regarding the currency exchangeability issue, MSCI is calling for the South Korean government to open around-the-clock won trading markets in Hong Kong, New York, London and the like while the government is finding it difficult to accept the request out of concerns over speculative trading or large-scale disinvestment. According to the government, offshore forex markets are more suitable for global currencies such as the U.S. dollar, yen and euro.

The opening of an offshore forex market signifies that the South Korean government will be engaged in no smoothing operation even in the event of rapid fluctuations in the value of the Korean won. Then, the South Korean financial authorities might find themselves helpless against hot money attacks. The government proposed instead that it would extend the duration of the forex market by 30 minutes but MSCI did not welcome the proposal.

MSCI is planning to make public this year’s review list on June 15. Even if South Korea succeeds in joining it this year, it can be found in the MSCI World Index from June 2018 or later through an official announcement.

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