South Korea’s ongoing market reforms, including a recent move to start 24-hour currency trading this year, may position it to finally earn developed market status from index provider MSCI, but some say more work needs to be done.
Seoul has gradually been taking steps to improve market accessibility for global investors and has accelerated the opening up of its currency markets. Just two years ago, the dollar-won market was only open for six and a half hours a day.
South Korea, still classified as an emerging market by MSCI, plans to introduce 24-hour foreign exchange trading in July, two years after extending onshore won trading hours until 2am local time from 3:30pm. The finance ministry also said it will in September introduce a new system for offshore won trading to ensure sufficient liquidity in extended trading hours.
MSCI evaluates equity markets around the world each year to determine whether they should be classified as developed, emerging, frontier or standalone markets, using three criteria – economic development, size and liquidity requirements, and market accessibility.
The index compiler placed South Korea on its watchlist for a status change in 2008, consulting with global market participants on its potential reclassification. Participants identified the limited convertibility of the Korean won in the offshore currency market as a key barrier to its upgrade to developed market status. The country was removed from MSCI’s developed market watchlist in 2014 because of accessibility issues.
Experts see the latest currency market measures as crucial to securing the coveted rerating.
Besides opening up its currency market, South Korea has made other moves towards upgrading its market status including lifting a shortselling ban and improving shortselling regulations, easing reporting requirements, expanding OTC transactions and requiring more corporate filings to be released in English.
Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, said South Korea has made significant strides but barriers under MSCI’s market accessibility criteria remain.
“The most critical is achieving a level of FX market liberalisation that effectively replicates the flexibility of offshore markets seen in developed economies – things like unrestricted convertibility and seamless onshore-offshore integration,” she said.
While the government’s plan to extend FX trading and intention to relax rules for offshore transactions is a positive step, implementation and market adoption will be key.
“MSCI has emphasised the need for these reforms to be fully operational and tested over time, with feedback from international investors confirming their effectiveness,” she said.
“If the 2026 reforms deliver as promised, we could see Korea placed on the watchlist for potential upgrade in the June 2026 review, but full reclassification might take another cycle to allow for evaluation,” she said.
The planned reforms mark a clear step closer to developed market status, said EJ Ethan Seo, head of global markets for Korea at BNP Paribas.
“Korea is pushing toward the internationalisation of their FX and a more attractive bond market onshore. [The move will drive] a pickup in local currency bonds. A lot of institutions require more liquidity in FX and easier transitions before they can enter the bond market in Korea,” said Hoe Lon Leng, Nomura’s global head of FX flow and emerging market linear rates trading.
Christian Heck, deputy head of the global value team and portfolio manager at First Eagle Investments, agreed. “The fact that the stock exchange is trying to accommodate 24-hour trading and offshore trading clearly signals that there is willingness by the stock exchange and financial regulator to make that push toward developed markets,” he said.
Capital controls
However, First Eagle's Heck pointed out that while China has offshore trading, that has not been enough to win it a developed market designation because of strict capital controls.
“In Korea there are also still capital controls in place," he said. "That would have to be addressed by the treasury or the central bank. Maybe it is enough, but there may be more to be done on the convertibility of the currency.”
But opening up currency markets and letting go of capital controls is tricky as the Korean won has been underperforming other regional currencies, sliding more than 6% against the US dollar over the past six months.
Opening up “took longer than expected – I would’ve thought they would have done it earlier, but it is not an easy thing to do especially during a time when the won is selling off. The hardest thing for most countries to do is to let go of their currencies and for them to become a bit more tradeable,” Nomura's Leng said.
In a widely expected move, the Bank of Korea on Thursday stood pat on interest rates as the won continues to trade near its lowest levels since 2009. The central bank also signalled a prolonged pause by removing language indicating the possibility of future rate cuts that was contained in its previous statement.
Policymakers in Seoul remain mindful of the Asian financial crisis, when the International Monetary Fund had to bail Korea out with an US$58bn package following the depletion of its foreign exchange reserves.
“The concern for BOK is capital flight or more outflows, but I think having this market for a 24-hour session is not necessarily a problem in terms of capital flight – in fact it might be able to keep volatility lower,” Leng said. “You can look at it as a much more stable and liquid market and that will keep volatility in check and won’t trigger panic selling of the won.
“It is the right time for Korea to open up. The market has a lot going for it and it is right to take this opportunity because there is interest in the market,” he said.
Inclusion impact
South Korea’s market is already one of the most liquid and accessible in the emerging world, with semiconductors and tech driving sustained foreign institutional investor inflows. Still, securing inclusion in MSCI’s Developed Markets Index would be a significant step forward.
Natixis's Garcia-Herrero said the upgrade would primarily bring passive inflows from funds tracking developed market indices, with estimates ranging from US$20bn to US$40bn over a few years.
"This could help stabilise capital flows, reduce equity price volatility, and attract more long-term institutional money, potentially lowering borrowing costs and enhancing Korea’s global financial prestige," she said, adding that the inclusion would symbolically affirm Korea’s transition to a fully mature economy and align it with peers like Japan and Australia.
BNP Paribas’ Seo expects the MSCI inclusion to not just bring flow side benefits but also other longer-term benefits such as a stronger market infrastructure.
“The upgrade would be a nice tailwind, but it is not a gamechanger. South Korea’s economic fundamentals, like its export recovery and AI-driven demand, are what’s really sustaining interest. It is more evolutionary than revolutionary,” Natixis's Garcia-Herrero said.