Latest Publictions
2023 Jan/09
Korea’s Potential Inclusion in the WGBI: Effects and Implications
Issue Papers 23-02
PDF
- Research Topic Capital Markets
- Page 23
- Summary
- The FTSE World Government Bond Index (WGBI) consisting of sovereign bonds issued by major economies is a leading index which is used as a benchmark index for major global pension funds. As a primary sovereign debt index, the WGBI contributes to inviting investment funds benchmarked against the index and enhancing the credibility of its member’s government bond market. A candidate country should fulfill various requirements including considerable market size, a stable institutional framework and convenience for international transactions.
Korea has recently been added to the FTSE Fixed Income Country Classification Watch List, which is considered a pre-WGBI inclusion stage. This is attributable to the Korean government’s active effort to address limited market accessibility that has served as an obstacle to Korea’s inclusion in the WGBI. Considering that Korea seems to meet all the criteria excluding restricted market access, FTSE Russell is likely to officially add Korea to the WGBI.
Korea’s WGBI membership is expected to attract more funds tracking the index and stabilize the sovereign debt market and FX market. This report finds that global economies newly added to the WGBI have experienced statistically significant effects including the increase in government bond prices and currency appreciation. The analysis of the domestic market predicts that the inclusion will have positive effects on government bond yields and exchange rates. While the influx of foreign investors is losing momentum, Korea’s joining the WGBI is expected to bring about economic benefits as it ensures a stable stream of funds to the sovereign bond market. Given that funds benchmarked against the WGBI tend to prefer long-term investments, WGBI membership is likely to further stabilize the domestic FX market and financial market.
Greater capital inflows resulting from WGBI inclusion should entail adverse effects of raising susceptibility to external factors, which requires caution. Notably, FTSE specifies conditions for the exclusion from the index and thus, failure in meeting relevant requirements could initiate the exclusion process. In this respect, Korea needs to consider expanding the domestic bond investor base and invigorating overseas stock investments as measures to mitigate external shocks while preparing for inclusion in the WGBI.