South Korea's KOSPI crossed the 9000 level this year and the country's stock market capitalization ranks around 7th globally, yet the Korean stock market remains classified as an emerging market by Morgan Stanley Capital International (MSCI). This year, South Korea again failed to be included in MSCI's Developed Market (DM) Watch List. MSCI cited insufficient market accessibility as the primary reason, specifically pointing to restrictions on offshore won settlement that prevent foreign investors from freely procuring and settling Korean won outside the country. South Korea has been pursuing MSCI developed market status since 2003, was added to the Watch List in 2008 but removed in 2014 due to won conversion restrictions and market accessibility issues, and has faced repeated setbacks since resuming efforts in 2021. Financial authorities and the investment industry view MSCI developed market inclusion as a core foundation for the second phase of growth in the domestic stock market, with expectations for resolving the 'Korea Discount' and expanding inflows of global long-term investment capital.
MSCI Developed Market Index and Its Significance for South Korea
MSCI categorizes global stock markets into Developed Markets (DM), Emerging Markets (EM), and Frontier Markets (FM), and calculates global indices accordingly. Major institutional investors worldwide—including pension funds, sovereign wealth funds, and asset management firms—use MSCI indices as investment benchmarks. The Developed Market index comprises 23 countries including the United States, the United Kingdom, and Japan.
South Korea's economic scale and stock market capitalization are at developed market levels, but the country remains in the emerging market category due to insufficient market accessibility for foreign investors and institutional credibility. The government is advancing capital market modernization efforts to achieve developed market index inclusion, including opening the foreign exchange market, improving short-selling systems, and expanding English-language disclosures. South Korea was included in MSCI's emerging market index in 1992 and has been pursuing developed market status since 2003. The country was added to the Watch List in 2008 but was removed in 2014 due to won conversion restrictions and market accessibility issues; re-entry attempts since 2021 have also failed to secure Watch List status through this year.
MSCI developed market index inclusion is not merely an index upgrade but signifies that South Korea's capital market systems and investment environment meet global standards. Financial authorities and the financial investment industry view this as a core task for the second phase of growth in the domestic stock market, including expanded inflows of global long-term investment capital and resolution of the 'Korea Discount.'
MSCI Cites Market Accessibility Deficiencies in 2025 Assessment
MSCI again did not include South Korea in the Developed Market Watch List this year, citing 'market accessibility' deficiencies as the reason. The organization specifically identified offshore won market restrictions as the largest obstacle, noting that foreign investors cannot freely procure and settle Korean won outside South Korea. Global institutional investors face difficulties immediately securing won during large-scale transactions and encounter high conversion costs and transaction risks.
MSCI also pointed out that despite extended foreign exchange market trading hours, insufficient overnight liquidity makes free conversion and trading difficult. Regarding short-selling systems, MSCI positively evaluated the full resumption and introduction of a naked short-selling prevention system, but noted that newly introduced monitoring and IT systems create operational burdens for market participants, reducing accessibility.
While MSCI acknowledged the government's institutional improvement efforts including foreign exchange market opening and short-selling resumption, the organization assessed that more time is needed for reforms to stabilize in the market and for foreign investors to experience tangible effects. Economic scale ultimately took a back seat to institutional credibility and investment environment concerns in blocking Watch List inclusion this time.
Government Implements 24-Hour FX Market and Offshore Won Settlement Pilot
Financial authorities announced the 'Comprehensive Roadmap for Foreign Exchange and Capital Market Reform for MSCI Developed Market Index Inclusion' in January and are advancing foreign exchange and capital market institutional improvements. The government developed improvement tasks across 8 areas centered on the 6 items MSCI identified as insufficient last year, and has implemented a substantial portion.
Authorities are particularly accelerating foreign exchange market accessibility improvements. The won-dollar foreign exchange market began operating on a 24-hour basis from the 6th, and in September, a pilot 'offshore won settlement network' will launch to allow foreign financial institutions to directly settle won using domestic won accounts, with full implementation planned from next year.
Institutional improvements to enhance transaction convenience for foreign investors are also underway, including establishing an LEI (Legal Entity Identifier)-based investor identification system, expanding omnibus accounts, increasing English-language disclosures, and improving dividend procedures.
The Korea Exchange index usage rights issue, one of the largest obstacles to index inclusion, has been substantially resolved, confirming the possibility of inclusion. MSCI upgraded the investment product availability category from 'improvement needed (-)' to 'limited compliance (+)' last year, reflecting the information use agreement with Korea Exchange and the listing of MSCI Korea index futures on Germany's Eurex.
Financial Authorities Target Watch List Inclusion in 2026
Experts note this outcome should not be viewed as a government policy failure. Since MSCI acknowledged the government's foreign exchange and capital market reform efforts in this assessment, the key to Watch List inclusion going forward is demonstrating that systems have actually taken root in the market and proving sustainability and stability.
The Financial Services Commission and Ministry of Economy and Finance stated, 'We expect that steadily advancing reform tasks will naturally lead to inclusion in the MSCI Developed Market index.'
Choi Ji-woon, research fellow at the Korea Capital Market Institute, stated in a recent report, 'MSCI maintains the principle of initiating reclassification discussions when reforms are complete and market participants have sufficient time to evaluate their effects,' adding, 'It is important to ensure that foreign exchange market reforms and the offshore won settlement system stabilize and that no blind spots emerge afterward.'
For MSCI developed market index inclusion, a country must be on the Watch List for at least one year. Final inclusion is determined after evaluating market accessibility for global institutional investors. Actual inclusion takes approximately two years. Even if South Korea enters the Watch List next year, inclusion announcement would occur in 2028, with actual index inclusion taking place in 2029 or later.
FAQ
What did MSCI cite as the reason for South Korea's Watch List exclusion this year?
MSCI cited 'market accessibility' deficiencies as the primary reason for not including South Korea in the Developed Market Watch List this year. The organization specifically identified offshore won market restrictions as the largest obstacle, noting that foreign investors cannot freely procure and settle Korean won outside South Korea, and that insufficient overnight liquidity despite extended trading hours makes free conversion and trading difficult.
What reforms has the South Korean government implemented for MSCI developed market inclusion?
The government announced a comprehensive roadmap in January and is implementing reforms across 8 areas. Key actions include launching 24-hour won-dollar foreign exchange market operation from the 6th, piloting an offshore won settlement network in September with full implementation planned from next year, establishing an LEI-based investor identification system, expanding omnibus accounts, increasing English-language disclosures, and improving dividend procedures.
