The South Korean government is actively pursuing the reclassification of its government bonds to a developed status within Bloomberg’s bond index in addition to its inclusion in the World Government Bond Index (WGBI). This upgrade could significantly increase foreign investments in Korean government bonds from global pension funds and sovereign wealth funds.

According to the Ministry of Finance, discussions with Bloomberg regarding the developed country reclassification for South Korean bonds are underway. With Bloomberg set to conduct its regular national classification review early next year, the possibility of upgrading South Korea’s status to developed is on the table.

The Bloomberg Global Aggregate Bond Index is considered one of the three major global bond indices, alongside FTSE Russell’s WGBI and JPMorgan’s Emerging Market Bond Index. While South Korean bonds are already included in the Global Aggregate Bond Index, they still hold an emerging market classification within Bloomberg’s indices.

In 2024, Bloomberg began reviewing whether to change South Korea’s classification from emerging market status, having previously listed South Korea, along with countries like the Czech Republic, Israel, and Taiwan, as under consideration for this change. However, in April of this year, after soliciting feedback from market participants, it decided to maintain the existing emerging market classification, though it acknowledged these countries as high-income according to World Bank standards and acknowledged their potential for reclassification to developed status in the future.

If Korean bonds are reclassified as developed nations, it could lower the investment barriers for foreign institutional investors who restrict their investments to developed market bonds. This group includes global pension funds and sovereign wealth funds that focus on developed country bonds or exclude emerging market bonds from their investment benchmarks.

One notable example is the Government Pension Fund Global of Norway, one of the world’s largest sovereign wealth funds. In 2019, it decided to exclude emerging market bonds from its investment benchmark, which meant that Korean government bonds, classified as emerging at the time, also fell out of its portfolio.

In fact, the holdings of Norwegian sovereign wealth fund in Korean government bonds plummeted from 49 billion Norwegian krone (approximately 7 trillion KRW) at the end of 2019 to zero by the end of 2024. By the end of the previous year, their holdings stood at only 240 million Norwegian krone (approximately 36 billion KRW). However, in the first half of this year, the fund significantly increased its investments in Korean government bonds to 15 billion Norwegian krone (approximately 2.3 trillion KRW). Expectations are rising that further inflows could reach several trillion KRW if the reclassification is successful.

Considering South Korea’s unusually high economic growth this year, there is an optimistic outlook regarding the potential for reclassification to developed country status. Analysts believe that Korean government bonds are already differentiated from other emerging market bonds in terms of credit ratings and interest rates.

According to a report released by State Street Global Advisors in February, as of the end of January, the yield to worst (YTW) for Bloomberg’s emerging market local currency bond index was 5.91%, slightly lower than the 6.07% for JPMorgan’s emerging market bond index. State Street noted that the inclusion of South Korea—rated AA—compared to Israel—rated A—was a major factor contributing to the yield difference. South Korean bonds accounted for 9.66% of Bloomberg’s emerging market local currency liquidity bond index, ranking second only to China, which holds a 10.02% share. In contrast, Korean bonds are not included in JPMorgan’s index.

However, the influx of new capital from a potential reclassifying as developed is expected to be less significant compared to the inflow associated with WGBI inclusion, as Korean bonds are already a part of Bloomberg’s Global Aggregate Bond Index, creating a different structural impact.

A finance ministry official stated, “If Korean government bonds are reclassified as developed, we expect new purchases from foreign institutional investors who have restricted their investments in emerging market bonds, such as the Norwegian sovereign wealth fund. However, since the bonds are already included in the existing index, estimating the specific additional inflow of capital is difficult.”