South Korea misses MSCI watchlist for upgrade

South Korea’s long-held ambition to join the Morgan Stanley Capital International (MSCI) Developed Market Index has been dashed once again. The country failed to make the watchlist, a prerequisite for inclusion, which means actual entry is more than two years away at the earliest.

Despite the KOSPI’s strong performance this year, outperforming most major global markets, Korea still faces structural hurdles that block a reclassification.

The MSCI indices serve as key benchmarks for global institutional investors. South Korea has remained in the Emerging Markets Index since 1992. It was briefly placed on the Developed Markets watchlist in 2008 but was removed in 2014. Since then, 11 attempts, including this year’s, have failed. Even if Korea is added to the watchlist next June, formal reclassification would not occur until at least a year later.

Last year, MSCI cited the Yoon Suk-yeol administration’s blanket short selling ban as a primary reason for withholding watchlist status. Short selling is a strategy in which investors sell borrowed stocks expecting prices to fall, allowing them to repurchase at a profit. Although the ban was lifted in March, MSCI noted lingering concerns about sudden regulatory shifts.

The 17-month ban, imposed to protect retail investors, has left lasting doubts about market stability. While controversial, short selling is widely regarded as a fundamental feature of mature markets, since it helps prevent bubbles and allows stock prices to reflect fair value.

MSCI also pointed to other structural issues, including restrictions on offshore foreign exchange trading, a burdensome investor registration process, and complex dividend procedures.

A shift to Developed Market status could draw an estimated 20 trillion to 50 trillion won in new foreign investment, along with significant symbolic value. While the KOSPI has climbed above 3,100 on optimism surrounding the new administration, President Lee Jae-myung’s campaign pledge to reach the “KOSPI 5,000” mark depends heavily on MSCI inclusion.

To meet this target and elevate the capital market, South Korea must build a stronger institutional framework that earns lasting trust from global investors and can withstand external shocks.