Korean government bonds will be newly included in the World Government Bond Index (WGBI) starting next month. Korea will join the index — one of the world's three major bond benchmark indices comprising 26 countries including the United States, the United Kingdom, and Japan — with a weighting of around 2%. Given annual government bond issuance exceeding 200 trillion won and the country's status as the world's 14th-largest economy, the inclusion may be somewhat overdue. But Korea has finally become a full-fledged member of the advanced bond market club. This can be seen as the fruit of the government's sustained institutional improvements, including tax exemptions on foreign investment in government bonds and extended foreign exchange market trading hours, as well as efforts to enhance national credibility.
This WGBI inclusion marks a critical turning point for the advancement of Korea's domestic capital markets. Increased foreign investment in Korean government bonds will help lower bond yields and stabilize the exchange rate. Global investment funds tracking the WGBI amount to between $2.5 trillion and $3 trillion, and Korea can expect inflows of at least $50 billion and up to $60 billion (approximately 70 trillion to 90 trillion won). If treasury bond yields stabilize downward by 20 to 30 basis points during the second and third quarters of this year, as experts predict, it would provide some breathing room for the Korean economy, which has been struggling with high interest rates and a weak won.
However, expanded foreign investment in government bonds could become a double-edged sword that amplifies volatility when financial markets turn unstable. Even though WGBI-tracking funds tend to be long-term in nature — such as those from central banks and sovereign wealth funds — short-term capital inflows become possible as the market grows. Just as Korea's stock market fluctuates with foreign buying and selling, the country must also prepare for the risk of market interest rate volatility.
What demands even greater vigilance is ensuring that WGBI inclusion does not become a tool for fiscal expansion. Beyond this year's budget of 728 trillion won, the government is preparing a supplementary budget of around 25 trillion won under the pretext of responding to war risks involving Iran. While the government says it will use excess tax revenue this time, the temptation to issue more government bonds could arise at any moment. The reality of rapidly rising mandatory spending driven by structural factors such as low birth rates and an aging population cannot be overlooked either. A debt-fueled spending spree without expenditure adjustments and improvements in economic fundamentals could threaten fiscal soundness. Only by blocking populist spending controversies through targeted support and accelerating structural reform can Korea maximize the benefits of WGBI inclusion and elevate its capital markets to the next level.