SEOUL — South Korea’s long-standing ambition to be reclassified as a "Developed Market" (DM) by Morgan Stanley Capital International (MSCI) has faced another setback. In its 2026 Annual Market Classification Review released on June 23, the global index provider opted not to include South Korea on its "Watchlist," a prerequisite for a formal promotion from the current "Emerging Market" (EM) status.

Lingering Concerns Over FX Accessibility

MSCI acknowledged the proactive measures taken by South Korean financial authorities to improve market transparency and accessibility, including the recent reforms in foreign exchange (FX) regulations. However, the index provider emphasized that investors believe fundamental structural issues remain unresolved.

The core of the issue lies in the accessibility of the Korean Won (KRW) in offshore markets. MSCI pointed out that the won remains non-deliverable in international markets. Currently, foreign investors primarily trade won-based derivatives through Non-Deliverable Forwards (NDFs), which settle the difference in U.S. dollars rather than through the physical delivery of the currency. Despite the recent extension of domestic FX trading hours, MSCI highlighted that liquidity during these extended hours remains insufficient, limiting the operational flexibility required by global index fund managers.

Regulatory Hurdles and Market Infrastructure

Beyond currency issues, MSCI’s assessment also focused on the operational challenges faced by institutional investors. Specifically, the report mentioned that participants are navigating significant operational burdens following the full resumption of short-selling in March 2025, particularly under the newly implemented market surveillance regulations.

Furthermore, issues regarding the usage of exchange data for financial product creation, as well as friction in investor account opening and settlement procedures, were cited as factors that keep South Korea trailing behind global standards for developed markets.

Government Roadmap and Future Outlook

The South Korean government has been aggressively pursuing structural reforms to meet MSCI’s criteria. Earlier this year, the authorities unveiled a comprehensive roadmap with 39 initiatives across 8 key areas, including mandatory English disclosures for listed companies and the integration of the Korean FX market into the global 24-hour trading system.

Market analysts, however, remain cautiously optimistic. "While the classification review underscores the gap between current regulations and global investor expectations, the government’s commitment to reform is clear," said Lee Jae-won, a researcher at Yuanta Securities. "We expect a more positive evaluation in 2027, as the offshore won clearing network and 24-hour FX trading become fully operational."

What Comes Next?

Since its inclusion in the Emerging Market index in 1992, South Korea has been seeking a promotion to DM status for over a decade. It was last on the MSCI Watchlist in 2014 before being removed.

To be considered for promotion, a country must spend at least one year on the Watchlist. With this year’s bid unsuccessful, the earliest possible scenario for re-entry into the Watchlist is next year. Should South Korea be added to the Watchlist in June 2027, a formal announcement for index inclusion would not occur until 2028, with the actual reclassification taking effect as late as May 2029.

For now, South Korea remains a key player in the Emerging Markets index alongside nations like China and India, while investors and policymakers alike look toward next year's review as the next critical checkpoint in the journey to reach developed market status.