By Choi Sang-dae

Vice Minister of Economy and Finance

In the history of Korea’s treasury bond market development, 2002 is remembered as the year that marked a significant milestone -- inclusion into the Bloomberg-Barclays Global Aggregate Index, one of the world's three major bond indices. It was the first step toward globalization of the nation’s treasury market that led to more than a fivefold increase in foreign investment in just one year.

For several years into 2002, the Korean government concentrated its efforts to make the treasury bond market more efficient and attractive by introducing institutional frameworks such as the Primary Dealer system and lifting the restriction of the foreign investment cap on listed bonds. The BBGA inclusion was a distinct achievement as a result of these diverse and continuous efforts.

This year, Korea is once again taking on a new challenge by pursuing its inclusion in the World Government Bond Index, which is considered a bond index for advanced countries. If included, Korea will become a member of the world’s three major bond indices, except JP Morgan’s Emerging Market Bond Index that Korea is not subject to inclusion. As the WGBI’s follow-up fund reaches $2.5 trillion, approximately $54 billion-$58 billion of foreign investment inflow is expected. The inclusion is also anticipated to contribute to resolving the "Korea discount," a tendency of undervaluing Korean treasury bonds compared to the nation’s economic fundamentals, by deepening investors’ confidence and strengthening market stability.

Korea has already met the quantitative requirements for inclusion. The outstanding balance of Korea’s treasury bonds is approximately $800 billion, far exceeding the requirement for WGBI inclusion ($50 billion). Korea's credit rating of AA (S&P) is also above the membership requirement of A-.

Furthermore, there are high expectations that the qualitative requirement of market accessibility will soon be met as the Korean government promptly embarked on diverse institutional reforms to enhance market accessibility after being added to the WGBI Watch List in September of last year. In particular, it exempted withholding tax levied on investment in treasury bonds for international investors from January 2023, and simplified the process for third-party onshore foreign exchange as of March 29. The main initiatives that are in the process of undertaking include the abolition of the Investment Registration Certificate, opening of the foreign exchange market as well as resumption of the omnibus account for treasury bonds linked with the International Central Securities Depositories. By pursuing these institutional reforms without a hitch, the Korean government will do its best to ensure Korea’s inclusion in the WGBI this year.

According to FTSE Russell, the provider of the WGBI, “the practical experiences of investors” are very important elements to joining the WGBI. It was the reason why other countries took two years or more to obtain WGBI membership after being placed on the Watch List. The Korean government is well aware that institutional reforms cannot be completed until they provide tangible improvements for investors. Based on global investors’ feedback, the government will continue various efforts to further enhance investors’ convenience even in the case of revised regulations already in effect. For instance, regarding tax exemption, it has actively reflected foreign investors’ opinions such as simplification of the reporting process and shortening of approval procedures. Official documents in English, which have been the most requested by global investors, will also be provided at the earliest possible date. In addition to institutional reforms, the Korean government will try to communicate with global investors more frequently. Through Investor Roundtables, it will promote Korea’s achievements derived from the recent institutional improvements and its upcoming plans in detail. The government also intends to continue its engagement with FTSE Russell through diverse channels including regular working-level consultations as well as high-level meetings.

Since the first government bond was issued in 1950, Korea’s treasury bond market has achieved remarkable growth in terms of both quantity and quality. The market size almost reached the top 10 in the world, and its infrastructure is now comparable to that of advanced markets. However, as the role of public finance in solving various social issues becomes increasingly important, efforts for further improvement of the government bond market efficiency and extensive expansion of the demand base also become ever more crucial. It is a must-go way to improve domestic regulations in line with global standards and to remove obstacles for foreign investors. The WGBI inclusion will prove Korea’s treasury bond market is on the right track, and 2023 will be marked as a milestone year for the nation’s treasury bond market to take another big leap.

Choi Sang-dae is the South Korean vice minister of economy and finance. Views in this column are his own. – Ed.