FTSE Russell likely to add S.Korea to watch list for debt index inclusion -vice minister

© Reuters. FILE PHOTO: A man walks in a park at a business district in Seoul, South Korea, March 23, 2016. Picture taken on March 23, 2016. REUTERS/Kim Hong-Ji

By Cynthia Kim, Jihoon Lee and Seunggyu Lim

SEOUL (Reuters) -FTSE Russell is likely to add South Korea to a watch list in coming weeks for inclusion in its World Government Bond Index, the country's vice finance minister said on Wednesday, heralding a move that could bring huge inflows of foreign funds.

"We are closely working with FTSE Russell ... and we've been receiving positive signs from them," Choi Sang-dae, second vice finance minister in charge of budget and treasury bond markets, told Reuters in an interview.

"We see a high chance of joining the watch list this September, although a final decision has not been made yet," said Choi, describing South Korea's progress toward inclusion in one of FTSE Russell's flagship indexes.

The WGBI comprises sovereign debt from more than 20 countries and global funds tracking the index are estimated at about $2.5 trillion, with Japan having the biggest weighting in Asia.

The index provider reviews its watch list for possible inclusion every March and September, with additions announced in the latter month.

Inclusion in the index could potentially draw inflows of billions of dollars into Korean bonds, and help lower borrowing costs.

Partly to improve South Korea's chances of entry, the finance ministry has laid out a path to fiscal repair in budget proposals for next year.

Choi said the government aimed to keep its debt at the equivalent of 52% of gross domestic product by 2026, just slightly up from the 50% estimated for Asia's fourth largest economy this year.

On Tuesday, the finance ministry said it would cut annual government spending in 2023 for the first time in more than a decade, as it strives to pare pandemic-era stimulus and help the central bank tamp down inflationary pressures.

Choi said subsidies for education and hydrogen cars would be pruned gradually over the next few years.

Goldman Sachs Group Inc (NYSE:GS). reckons South Korea could be allotted a weighting of 2.34% in the index, and its addition could trigger inflows of $60 billion to South Korean bonds as a one-off adjustment.

The finance ministry is seeking to remove a tax on foreign investment in its bond market so as to boost access for overseas investors in a bill now being reviewed by the National Assembly for final approval.

In addition to the tax burden, foreigners' limited access to South Korea's foreign exchange market has been often cited as a major obstacle to inclusion in the index, but Choi said no major concern had been raised yet in talks with the index provider.

There was "no chance" South Korea would put plans to join the index on ice, even if the won were to gain sharply against the dollar, Choi added.

South Korea's transition toward fiscal tightening comes as many other governments persist with expansionary fiscal policies even as their central banks have raised interest rates to tackle soaring inflation.

"Economic recession has not yet materialised, while high inflation still persists, and there may be side-effects to excessively expansionary fiscal policy in these conditions," Choi said.

"Expanding fiscal policy is not always the best answer to support economic growth."

As the numbers of school-age children fall, subsidies for students from primary to middle grades could also be cut.

"Fiscal policies need ... to help the underprivileged, who suffer more in times of economic downturns," Choi added.