Why MSCI still won’t call South Korea a developed market

Currency restrictions, fragmented reforms, and investor access limitations leave global funds wary

South Korea has once again failed to secure a place on MSCI’s Developed Market Index or even regain a spot on its watchlist, extending its emerging-market status into a 11th consecutive year.

In its annual Market Classification Review released on June 24, MSCI cited continued barriers to foreign investor access, regulatory inconsistency, and underdeveloped market infrastructure as key reasons for Korea’s exclusion. The country was removed from the watchlist in 2014 and has not been reconsidered since.

The classification carries weight among global institutional investors, often influencing capital allocation decisions and the flow of passive investment funds. Goldman Sachs has estimated that inclusion in MSCI’s Developed Market Index could result in up to $30 billion in foreign capital inflows to South Korea’s financial markets.

Despite a series of recent reforms, MSCI concluded that Korea still falls short of the standards expected of developed markets. In its latest assessment, the index provider highlighted five major shortcomings:

Illustrated by Chosun Design Lab·Midjourney

In the latest review, MSCI highlighted five critical issues:

1. Limited offshore currency convertibility: The Korean won remains largely inaccessible to foreign investors in offshore markets. While the government began allowing Registered Foreign Institutions to access the domestic interbank FX market in 2024 and extended trading hours, MSCI noted these steps fall short of international norms. It emphasized the need for a fully convertible currency and deep, liquid FX markets that offer efficient execution, particularly during periods of high trading volume.
2. Frequent policy shifts around short selling: Although MSCI welcomed the lifting of Korea’s short selling ban in March 2025, it pointed to the government’s repeated policy reversals since 2020 as a source of regulatory instability. The abrupt reintroductions and removals of the ban have shaken investor confidence, MSCI said.
3. Opaque dividend practices: Reforms introduced in 2023 aimed to improve transparency by encouraging companies to disclose dividend payouts before the record date. However, only 7.7% of dividend-paying firms have adopted these changes, according to the Korea Capital Market Institute. MSCI noted that a lack of predictability continues to be a deterrent for long-term investors.
4. Restricted access to derivatives and investment instruments: International investors increasingly rely on tools such as ETFs, futures, and swaps to manage exposure and hedge risks. MSCI said Korea’s restrictions on the use of exchange data for financial product development have limited the availability of such instruments, curbing market efficiency.
5. Operational barriers to investor registration and OTC transactions: While the government replaced its legacy investor registration certificate with Legal Entity Identifiers in 2023 and eased rules for omnibus accounts, MSCI said these mechanisms are not widely adopted and still face operational friction. It also noted that OTC transaction systems remain underutilized.

MSCI emphasized that any future reclassification would require all structural issues to be fully addressed, reforms to be completely implemented, and global investors to have sufficient time to evaluate the changes in practice.

Barring significant progress, South Korea’s next opportunity to be considered for Developed Market status will come in MSCI’s 2026 review.