Global index provider MSCI has dropped South Korea from the list of candidates for developed market status in its reclassification review released on Wednesday, saying the nation has not made enough effort to improve market openness to graduate from being an emerging market.

MSCI, the research arm of U.S. banking group Morgan Stanley, said South Korea meets most of the criteria to be included in the developed markets in terms of economic development, market size and liquidity, but Korean authorities have made little progress on market accessibility issues.

“There has been a lack of meaningful developments over the past four years with respect to the two accessibility issues highlighted by international institutional investors: the limited convertibility of the Korean won and the resulting downstream operational inconveniences resulting from the rigidity of the ID system,” MSCI said in a report.

MSCI said South Korea will be reconsidered as a candidate only after it improves limited openness to foreign investors.

“The MSCI Korea Index may be added back to the review list for potential reclassification to Developed Markets as soon as there is meaningful progress toward resolution of the above issues,” it said.

South Korea has been considered a candidate for developed market classification since 2008 but has not been able to join the club due to market access issues, one of the factors that MSCI focuses on.

In last year’s report, MSCI said South Korea will only be able to join the ranks of developed markets after opening up its economy and making its currency fully convertible.

Other index providers have already promoted South Korea’s market status, with the FTSE giving Asia’s fourth-largest economy the developed market label in 2009.

The country currently makes up 16.1 percent of the MSCI Emerging Markets Index, the second-largest presence following China’s 18.6 percent.

Market watchers have paid keen attention to the MSCI’s decision on expectations that an upgrade would expose the local bourse to a wider pool of global equity funds. Hopes were not high this year due to a lack of tangible changes in the nation’s financial sector.

“MSCI has taken issue with South Korea’s market accessibility, including the limited currency convertibility and the rigid foreign investor registration system, but financial authorities have not changed their stance on those issues in the past years,” Han Bum-ho, an analyst at Shinhan Investment Corp., said in a report on Tuesday. “A change is not likely if (South Korea) offers the same wrong answer to the same question.”

The Korea Exchange, the main bourse operator, said the MSCI’s latest decision is not likely to have a meaningful impact on the local financial market as South Korea’s economy is on a sound track with strong export growth as the global economy recovery is gaining momentum.

KRX said it will continue to work with the government to improve the financial market, but the key issues addressed by MSCI, such as full currency convertibility and an ID system, need further policy consideration.

“The overall sentiment is that the government should carefully deal with such issues, taking into consideration their impact on the national economy and the financial market, rather than changing policies for the purpose of getting the developed market status,” KRX said in a release. “Regardless of the MSCI’s decision, we will make efforts to raise South Korea’s global competitiveness by establishing effective market infrastructure and strengthening its networks with international investors.”

Some argue that a leap to join the developed markets would not dramatically change the local bourse because foreign investors have already included South Korea’s market bellwethers, such as Samsung Electronics and Hyundai Motor, in portfolios of actively managed funds.

“The impact of an upgrade to developed market is not clear as neither total net asset of funds benchmarked to the MSCI index nor portion of funds following the emerging markets index are known,” said Park Sung-hyun, a chief strategist at Hanwha Investment & Securities Co.

MSCI tracks stock market performance across 78 economies classified into three market categories ― developed, emerging and frontier markets. (Yonhap)