MSCI keeps South Korea in emerging market category

Currency restrictions and infrastructure issues cited as barriers to developed market upgrade

South Korea has once again failed to make it onto the watch list for a potential upgrade to developed market status by global index provider MSCI, extending its long-standing classification as an emerging market.

In its annual market classification review released June 25 Korea time, MSCI acknowledged progress by South Korea’s financial regulators but said key obstacles to market accessibility remain. Chief among the concerns is the country’s ongoing restriction on offshore trading of the Korean won, which the index provider said hampers currency liquidity and creates friction for foreign investors.

Morgan Stanley Capital International (MSCI) logo./Reuters-Yonhap

MSCI also cited limitations in the nation’s trading infrastructure. While Korea has adopted the globally recognized Legal Entity Identifier (LEI) system for investor registration, restrictions still apply to omnibus accounts and over-the-counter (OTC) transactions. The domestic derivatives market—including exchange-traded funds (ETFs), futures, options, and structured products—also lacks the accessibility and depth required to support increasingly complex global investment strategies.

The full resumption of short selling was noted as a positive development. However, MSCI added that foreign investors remain cautious due to Korea’s history of abrupt regulatory changes, which continue to raise concerns over policy stability and transparency.

“Potential reclassification consultations require that all issues have been addressed, reforms have been fully implemented, and market participants have had ample time to thoroughly evaluate the effectiveness of the changes,” MSCI said in its statement.

Seoul has been campaigning for inclusion in MSCI’s developed market index since being added to the watch list in 2008. But the effort has repeatedly stalled, and Korea was dropped from the list entirely in 2014. With this year’s rejection, the next opportunity for reentry won’t come until 2026.

Government officials and financial industry groups said they remain committed to reforms and plan to introduce a new roadmap aimed at addressing MSCI’s lingering concerns.

South Korea remains classified as an emerging market alongside peers such as China, Brazil, and India. Some global investment banks estimate that a successful reclassification could trigger as much as $25 billion in capital inflows. UBS has said a developed market upgrade would likely improve Korean equity valuations and attract more long-term institutional investment.