MSCI Retains South Korea in Emerging Markets Amid Accessibility Hurdles
Global index provider MSCI has decided to keep South Korea within its emerging-market index, citing persistent challenges in market accessibility. While the country has implemented several reforms, the index provider noted that the foreign exchange market still lacks the liquidity and standards required for developed-market status.
Foreign Exchange Barriers and Liquidity Concerns
The primary reason for MSCI's decision lies in the limitations of South Korea's onshore foreign exchange market. According to the index provider, the Korean won remains non-deliverable offshore, which poses a significant hurdle for global institutional investors.
Furthermore, MSCI highlighted that liquidity during extended onshore foreign exchange trading hours is still inadequate. To meet the execution standards expected in developed markets, investors require more seamless and deep liquidity, which the Korean market has yet to consistently provide. While MSCI acknowledged the recent reforms introduced by South Korean authorities, it emphasized that more time is needed to assess whether these structural changes deliver sustained, long-term improvements.
Government Reforms and the Path to Developed Status
The South Korean government has made securing developed-market status a top policy priority. Since President Lee Jae Myung took office in June 2025, the administration has rolled out a series of aggressive market reforms. A key component of this strategy is the plan to introduce round-the-clock foreign exchange trading, scheduled to commence in the second half of this year.
The South Korean finance ministry and financial regulators have responded to the decision by noting that the country's exclusion from the developed-market watchlist this year reflects the transitional phase of these reforms. Authorities remain optimistic, stating that continued progress in capital market and foreign exchange liberalization will eventually pave the way for inclusion in the MSCI developed-market index.
KOSPI Performance vs. Index Classification
Interestingly, South Korea’s classification as an emerging market stands in stark contrast to its recent equity market performance. Despite the index setback, the benchmark KOSPI index has emerged as the world's best-performing equity benchmark over the past year. Driven by massive global investment in artificial intelligence (AI) infrastructure, semiconductor stocks have propelled the KOSPI to double its value.
The market has shown resilience despite volatility; for instance, the KOSPI recently rebounded by more than 3% following a sharp nearly 10% tumble. Analysts suggest that while the MSCI decision was largely anticipated due to weak performance across accessibility criteria in the annual review, the underlying strength of South Korean tech giants continues to attract significant global interest.
Key Takeaways
- Accessibility remains the bottleneck: MSCI cited inadequate liquidity in the onshore foreign exchange market and the non-deliverable nature of the Korean won as primary reasons for maintaining emerging-market status.
- Reform implementation is ongoing: The South Korean government is pushing for round-the-clock foreign exchange trading starting in H2 2025 to meet developed-market standards.
- Market strength persists: Despite the classification, the KOSPI has been a global leader in performance over the last year, fueled by the AI-driven semiconductor boom.