South Korea’s years-long bid for developed-market status has suffered yet another setback after global index provider MSCI Inc. declined to add Asia’s fourth-largest economy to its watchlist for potential inclusion.
In its 2025 market classification review released on Tuesday, MSCI said it would not designate Korea as a “market under review” for potential reclassification to developed status. That leaves the country stuck in the emerging-market category, where it has languished since being taken off the watchlist in 2014.
The latest snub is a blow to Korean policymakers, who previously expressed growing confidence that the country’s extensive recent reforms, ranging from foreign exchange liberalization to corporate governance improvements, would finally earn recognition.
Kim So-young, vice chairman of Korea’s financial regulator, the Financial Services Commission (FSC), recently said that the likelihood of Korea being added to the watchlist was “very high.”
MSCI remained unconvinced, however.
Though noting modest improvements in accessibility, particularly with the lifting of a short-selling ban earlier this year, the index provider cited limited foreign exchange reforms and restricted availability of investment instruments.
Such limits have often been a source of complaints among foreign investors interested in Korea’s blue-chip stocks such as Samsung Electronics Co. and Hyundai Motor Co.
KOREA DISCOUNT
MSCI has cited Korea’s opaque stock-related rules and foreign ownership limits as "the Korea discount," or reasons for not raising the country to developed market status.
MSCI is “continuing to monitor the implementation and market adoption of measures to enhance the accessibility of the Korean equity market,” the New York-based firm said in a statement on Tuesday.
Alongside economic development, market size and level of liquidity, market accessibility is one of the key criteria the MSCI uses to categorize a country as a developed, emerging or frontier market.
UBS expects Korea’s inclusion in the MSCI Developed Markets Index to trigger up to $24 billion in foreign fund inflows Other global stock market index providers, such as Dow Jones, S&P and FTSE, have classified the Korean equity market as developed.
The latest reclassification report comes after MSCI signaled last week that Korea’s pursuit of developed-market status continues to face impediments, including the need for improved capital flow and better disclosures catered to foreign investors.
China and India are Korea’s peers in MSCI’s emerging-market category.
According to MSCI, Korea scores “negative” on six of 18 criteria, down from seven last year.
ROOM FOR IMPROVEMENT
While the improved accessibility of short-selling counted in its favor, areas such as foreign exchange market openness, omnibus account usage, foreign investor registration, settlement systems and the availability of investable products continued to fall short of developed market standards, the index compiler said.
Operational hurdles persist in the foreign investor registration process, MSCI noted, adding that Korea's restrictions on omnibus accounts and over-the-counter (OTC) trading continue to limit the efficiency of investment strategies.
Dividend procedures are another sticking point.
Although the Korean government introduced a system allowing dividends to be confirmed before record dates, in line with global norms, only a small fraction of listed companies have implemented the change, according to MSCI.
Korea’s hopes of a near-term upgrade are now effectively postponed until at least 2028.
To be formally reclassified, a market must spend at least one year on the watchlist, which MSCI updates every June.
That timeline means Korea would need to be placed on the list in June 2026 to gain formal inclusion in June 2028, assuming all hurdles are addressed.
STAKES ARE HIGH
Investment banking officials say the stakes are high.
Swiss-based multinational investment bank UBS estimates that Korea’s inclusion in the MSCI Developed Markets Index could trigger up to 34 trillion won ($24 billion) in passive foreign fund inflows.
Financial Services Commission Vice Chairman Kim So-young Equity strategists said that such a move is essential if the Lee Jae-myung administration is to realize its ambitious goal of lifting the Kospi benchmark to 5,000 points.
On Wednesday, the Kospi index closed up 0.2% at 3,108.25.
The government is expected to intensify its reform drive to enhance the chances of MSCI’s upgrade of Korea to advanced status.
Officials from the Ministry of Economy and Finance, the FSC, the Bank of Korea, Korea Exchange and Korea Securities Depository will launch a joint public-private task force later this month.
The group is expected to craft a comprehensive road map for MSCI inclusion, with details to be announced later this year.
Still, analysts caution that without sweeping and consistently applied structural reforms — not just regulatory tweaks — the market’s upgrade aspirations may continue to face disappointment.
“Foreign investors need to see durable, institutional changes, not just cosmetic fixes or promises,” said a Seoul-based strategist. “MSCI is asking for credibility. Korea still has work to do.”
Write to In-Soo Nam at isnam@hankyung.com Joel Levin edited this article
