The IMF trauma that was never overcome - How a 30-year crisis blocks a global economic giant

The lasting footprint of a three-decade-old financial crisis is emerging as the primary obstacle to the full international recognition of one of the planet's strongest economies as a "developed market," despite it recording one of the largest stock market rallies globally. The strict stance of international rating agencies brings to light a deep structural contradiction: how the defensive mechanisms adopted by a state to protect itself from the International Monetary Fund (IMF) in the past are today coming into direct conflict with the demands of modern foreign capital. At the heart of the matter lies South Korea, which sees its main stock index triple its value since the beginning of 2025, driven by the global investment boom surrounding Artificial Intelligence (AI) and semiconductors. However, MSCI recently refused to upgrade the country, keeping it in the emerging markets category.

The MSCI verdict

In June 2026, MSCI maintained the country's classification as an emerging market, citing obstacles for foreign investors, and particularly the absence of a fully convertible offshore market for the Korean won. "The government is still haunted by the 'IMF trauma' and fears that foreign influence on the foreign exchange market will increase if offshore trading of the Korean won is permitted," said Hwang Seiwoon, a researcher at the Korea Capital Market Institute.

During the 1997 Asian financial crisis, the won lost about half its value within two months, while the country's foreign exchange reserves plummeted to a low level equivalent to just four or five days of imports. The turmoil brought South Korea to the brink of bankruptcy, skyrocketing short-term debt and triggering a wave of corporate insolvencies. Seoul was forced to request a bailout package from the IMF. The crisis left deep generational trauma on South Korea's economy and prompted the government to maintain strict control over the foreign exchange market. It restricted trading hours, kept settlement onshore, and rebuilt its foreign exchange reserves, making them some of the largest in the world.

The refusal to open the foreign exchange market

The president of South Korea, Lee Jae Myung, has set securing the MSCI upgrade as a key objective. His administration has enhanced minority shareholder rights and facilitated access for foreign investors. However, officials remain reluctant to fully open the foreign exchange market, especially with the won trading near levels observed during the 2008 global financial crisis.

Instead, they have implemented piecemeal reforms, such as approving omnibus accounts for foreign investors. These accounts allow brokerage firms to aggregate the investments of multiple clients, making trading in the South Korean stock market easier and cheaper. This week, the country introduced 24-hour trading of the won, but only with onshore settlement. MSCI acknowledged South Korea's progress in opening its market but stated these moves were insufficient, pointing to the lack of offshore won trading and shortcomings in the settlement of short selling.

"International institutional investors will need to be convinced" that 24-hour onshore trading of the won can provide liquidity and bid-ask spreads comparable to those of currencies in other developed markets, MSCI stated. "It will not be easy for the government to fully liberalize the foreign exchange market, given its fears of capital flight from the country," said Jongmin Shim, an equity analyst at CLSA. "The government continues to worry that it will not be able to control the won's value if the market opens completely."

Policymakers believe that an upgrade by MSCI would attract more stable, long-term capital and reduce market volatility. BNP Paribas Securities estimates that passive funds tracking MSCI indices could generate inflows of approximately 30 billion dollars. Others argued that the benefits would be less clear-cut. South Korea accounts for 24% of the MSCI Emerging Markets Index but would constitute only 3% of the developed markets benchmark, according to NH Investment & Securities. "Significant capital outflows are likely from small and mid-cap stocks that will not meet the criteria for the developed markets index, increasing concentration in large-cap stocks," analyst Kim Kyu-jin recently wrote in a report.

A symbolic upgrade

Shim of CLSA noted that an upgrade would be largely symbolic because South Korea is already widely regarded as a developed economy. "It is like achieving yet another milestone, but the market is doing well even in the emerging markets camp," he said. South Korea is the 10th largest economy in the world and has already been classified as a developed market by FTSE Russell and S&P Dow Jones. MSCI had placed the country on its developed market watch list in 2008 but removed it in 2014 due to limited progress on currency liberalization and other regulatory concerns.

The country's stock market has expanded rapidly alongside its semiconductor champions. Samsung Electronics and SK Hynix, which have become central to the global AI boom, helped boost the value of South Korea's stock market to 4.4 trillion dollars, making it the eighth largest in the world, ahead of Germany and France. "But it is not a matter of market performance; it is a matter of accessibility and investability," said Namuh Rhee, chairman of the Korean Corporate Governance Forum. Rhee remained skeptical about whether an upgrade would come anytime soon, citing regulatory uncertainty and continuous policy reversals. A short selling ban introduced in 2023 was lifted just last year. "Investors remain cautious because they have seen too many instances of 180-degree turns and backtracking in the Korean government's policy," he said.

Foreign exchange market reforms

Following MSCI's latest decision, the government pledged to continue reforms in the foreign exchange and capital markets but presented no timetable for permitting offshore trading of the won. Policymakers hope that developed market status will help eliminate the "Korea discount," referring to the chronic undervaluation of South Korean companies. However, analysts stated that broader structural reforms will be required, as most companies outside the major chipmakers remain undervalued despite the two-year Kospi rally.

"Joining the developed markets camp does not automatically resolve the 'Korea discount,'" Shim said. "The government will need to push for bolder reforms, such as reducing dividend and inheritance taxes, so that large business conglomerates can adopt policies that are friendlier to shareholders."

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