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As South Korea is on track to have the world’s best-performing major stock index for a second year, its ambition to be recognised as a developed market is being held back by the scars of a crisis from three decades ago.
A blistering rally driven by AI chip suppliers Samsung Electronics and SK Hynix has helped the Kospi triple in value since the start of 2025. Along with a series of capital market reforms, Seoul had hoped it would help convince MSCI to reconsider South Korea for developed-market status — a goal it has pursued for more than a decade.
But last month, the index provider maintained the country’s classification as an emerging market, citing barriers for foreign investors, particularly the absence of a fully convertible offshore won market.
“The government is still haunted by the ‘IMF trauma’ and is afraid that foreign influence over the forex market will become bigger once they allow offshore trading of the Korean won,” said Hwang Seiwoon, a researcher at the Korea Capital Market Institute.
During the 1997 Asian financial crisis, the won lost about half its value in two months, while the country’s foreign reserves fell to a low equivalent to just four or five days of imports.
The turmoil pushed South Korea to the brink of default, driving up short-term debt and triggering a wave of corporate bankruptcies. Seoul was forced to seek a bailout from the IMF.
The crisis left generational scars in the South Korean economy and prompted the government to keep a tight grip on the currency market. It limited trading hours, kept settlement onshore and rebuilt foreign reserves to among the world’s largest.
South Korea’s President Lee Jae Myung has made securing an MSCI upgrade a key objective. His administration has strengthened minority shareholders’ rights and eased access for foreign investors.
But officials remain reluctant to fully open up the currency market, especially with the won trading near levels seen during the 2008 global financial crisis.
Instead, they have released piecemeal reforms, such as allowing omnibus accounts for foreign investors. The accounts let brokerages pool together multiple clients’ investments to make it easier and cheaper to buy South Korean stocks. This week, the country introduced 24-hour won trading but only with onshore settlement.
MSCI acknowledged South Korea’s progress in opening up its market but said the moves were insufficient, noting the lack of offshore won trading and weaknesses in short selling settlement.
“International institutional investors will need to be convinced” that 24-hour onshore won trading can provide liquidity and bid-ask spreads comparable to those of other developed market currencies, MSCI said.
“It won’t be easy for the government to fully liberalise the forex market, given their fears of capital leaving the country,” said Jongmin Shim, an equity analyst at CLSA. “The government remains concerned that it can’t control the won’s value” if the market is fully opened.
Policymakers believe an MSCI upgrade would attract more stable long-term capital and reduce market volatility. BNP Paribas Securities estimates passive funds tracking MSCI indices could bring roughly $30bn of inflows.
Others said the benefits would be less straightforward. South Korea represents 24 per cent of MSCI’s emerging markets index but would account for only 3 per cent of the developed benchmark, according to NH Investment & Securities.
“Significant capital outflows are likely from small- and mid-cap stocks that fail to qualify for the developed market index, increasing concentration in large-cap stocks,” analyst Kim Kyu-jin wrote in a recent report.
CLSA’s Shim noted that an upgrade would be largely symbolic because South Korea was already widely viewed as a developed economy. “It is like hitting another milestone, but the market is doing well even in the emerging market camp,” he said.
South Korea is the world’s 10th-largest economy and already classified as a developed market by FTSE Russell and S&P Dow Jones. MSCI put the country on its watch list for developed market status in 2008 but removed it in 2014 because of limited progress on currency liberalisation and other regulatory concerns.
The country’s equity market has expanded rapidly alongside its semiconductor champions. Samsung Electronics and SK Hynix, which have become central to the global AI boom, have helped lift the South Korean stock market’s value to $4.4tn, making it the world’s eighth largest, ahead of Germany and France.
“But it is not a matter of the market’s performance but of its access and investability,” said Namuh Rhee, chair of the Korean Corporate Governance Forum.
Rhee remained sceptical that an upgrade would come soon, citing regulatory uncertainty and repeated policy reversals. A short selling ban introduced in 2023 was only lifted last year.
“Investors are still cautious because they have seen too many cases of the Korean government’s policy U-turns and backpedalling,” he said.
After MSCI’s latest decision, the government pledged to continue foreign exchange and capital market reforms but offered no timetable for permitting offshore won trading.
Policymakers hope developed market status will help eliminate the “Korea discount”, referring to the chronic undervaluation of South Korean companies.
But analysts said broader structural reforms would be needed as most companies outside the major chipmakers remain undervalued despite the Kospi’s two-year rally.
“Inclusion into the developed market camp doesn’t automatically resolve the Korea discount,” Shim said. “The government should push for bolder reforms such as cutting dividend and inheritance taxes so that large conglomerates can adopt more shareholder-friendly policies.”