Amid growing expectations for Korea’s inclusion in the Morgan Stanley Capital International (MSCI) developed market index, this article explores the impact and future challenges that are accompanied by promotion in the MSCI index. If a developed market status is secured from the MSCI, Korea’s stock market is expected to attract a net foreign capital inflow ranging from $5 billion to $36 billion. However, it should be noted that the analysis result may vary depending on the amount of funds tracking the MSCI index and Korea’s weight in global market capitalization. As shown in the cases of Israel and Greece, inclusion in the MSCI development market index has contributed to reducing volatility of foreign capital flows and stock prices.
In its Global Market Accessibility Review, MSCI has presented six issues that Korea needs to improve. These include information flow, clearing and settlement and transferability, in addition to chronic problems such as the absence of an offshore currency market for the won, the mandatory foreign investor registration and restrictions on the use of stock indices. To address these matters, the Korean government’s latest plan to improve the foreign exchange market should be implemented properly to establish a solid foothold of the won as an international currency. The mandatory foreign investment registration also needs to be overhauled to raise the effectiveness and international compatibility of omnibus accounts. On top of that, additional efforts should be made to enhance market infrastructure, another obstacle previously mentioned by MSCI.
Securing a developed market status from MSCI has been one of Korea’s long-standing challenges, which can serve as a turning point for its financial market to take a leap forward. However, it is notable that the benefits of reclassification to the index cannot be realized within a short period and quite a few challenges to be resolved regardless of the MSCI index inclusion lie ahead. Accordingly, it is desirable to take the MSCI index inclusion as an opportunity to reinforce fundamentals of the financial market, rather than focusing only on the inclusion itself. If Korea strives to supply abundant liquidity to the stock market and strengthen market infrastructure to deal with the issues specified by MSCI, the promotion in the MSCI development market index would be achieved as a natural consequence.