FTSE Russell likely to add South Korea to watchlist for inclusion in debt index – deputy minister By Reuters
© Reuters. FILE PHOTO: A man walks in a park in a business district in Seoul, South Korea March 23, 2016. Picture taken March 23, 2016. REUTERS/Kim Hong-Ji
By Cynthia Kim, Jihoon Lee and Seunggyu Lim
SEOUL (Reuters) – Russell is expected to add South Korea to a watch list in the coming weeks for inclusion in its global government bond index, the country’s deputy finance minister said on Wednesday, announcing a decision that could lead to huge inflows of foreign funds.
“We are working very closely with FTSE Russell…and we have received some positive signs from them,” Choi Sang-dae, second deputy finance minister in charge of budget and treasury bill markets, said in an interview. Reuters.
“We see a great chance of joining the watch list in September,” Choi said, describing South Korea’s progress towards inclusion in one of FTSE Russell’s flagship indices.
The WGBI includes sovereign debt from more than 20 countries, with global funds tracking the index estimated at around $2.5 trillion, with Japan having the largest weighting in Asia.
The index provider reviews its watchlist for possible inclusion each March and September and announces additions each September.
Inclusion in the index could potentially attract billions of dollars into Korean bonds and help reduce borrowing costs.
Partly to improve the odds of getting into the index, the finance ministry has charted the course for fiscal repair in next year’s budget proposals.
Choi said the government aims to keep debt at the equivalent of 52% of gross domestic product by 2026, up slightly from the 50% estimated for Asia’s fourth-largest economy this year.
On Tuesday, the finance ministry said it would cut annual government spending in 2023 for the first time in more than a decade as it works to scale back pandemic-era stimulus and help the central bank to temper inflationary pressures.
Choi said subsidies related to education and hydrogen cars would be gradually reduced over the next few years, he said.
Goldman Sachs Group Inc. (NYSE:). it is estimated that South Korea could be assigned a 2.34% weighting within the index, and its addition could trigger $60 billion inflows into South Korean bonds as a one-time adjustment.
The Ministry of Finance is seeking to remove a tax on foreign investment in its bond market to improve market accessibility for foreign investors and the bill is currently being considered by the National Assembly for final approval.
In addition to the tax burden, limited access for foreigners to the South Korean foreign exchange market has often been cited as a major obstacle to inclusion in the index, but Choi said no concerns were raised. about this in discussions with the index provider. far.
Choi also said there was “no chance” South Korea would question its plans to join the index even if the won were to gain strongly against the dollar.
South Korea’s shift to fiscal tightening comes as many other governments persist with expansionary fiscal policies even as their central banks have raised interest rates to fight soaring inflation.
“The economic recession has yet to materialize, while high inflation persists, and there may be side effects to overly expansionary fiscal policy under these conditions. Fiscal policy expansion is not always the best response to support economic growth,” Choi said.
Subsidies related to education and hydrogen cars would be gradually reduced over the next few years, he said, adding that there would be a thorough review of spending for years to come.
And grants for elementary through middle school students could be reduced due to declining numbers of school-aged children.
“Fiscal policies must focus on rolling out a targeted approach to help the disadvantaged who suffer the most during economic downturns.”