South Korea retained its emerging market status by Morgan Stanley Capital International, with the ongoing short selling ban cited as a hindrance to the country's efforts for a status upgrade.

"The recent short selling ban introduces market accessibility restrictions," MSCI said Thursday when announcing the results of its market classification review for the global standard indexes.

In part, the New York-based index provider acknowledged and welcomed the recently proposed measures to improve the accessibility of the Korean equity market.

"However, in November 2023, a full ban on short selling was reimposed. While this ban is expected to be temporary, sudden changes in market rules are not desirable," MSCI noted.

Recently, the local financial authorities extended the short selling ban until March 30, 2025, anticipating the implementation of a computerized system to monitor and prevent illegal naked short selling by that time.

For potential reclassification, MSCI stated that it requires "all issues (to) have been addressed, reforms (to) have been fully implemented and market participants (to) have had ample time to thoroughly evaluate the effectiveness of the changes."

Ahead of Thursday's announcement, MSCI released its annual review of market accessibility, which indicated that "there were no improvements in Korea's accessibility ratings this cycle," suggesting that Korea will not be reclassified this year.

While acknowledging the introduction of new measures to enhance market accessibility, the report pointed out that some initiatives, such as phasing in mandatory English disclosures for listed firms, have not been fully implemented. Others, such as easing the registration process for foreign investors, will require more time to assess their market impact, it added.

Regarding the country's short selling status, the report downgraded it from "+" to "-," reflecting a deterioration in the short selling system.

Based on three criteria — economic development, size and liquidity requirements, and market accessibility — MSCI categorizes equity markets worldwide each year as developed, emerging, frontier or standalone markets.

After first getting categorized as an emerging market in 1992, Korea was periodically on the watch list for its status upgrade to a developed market between 2008 and 2014 but failed to return to the list since then, with limited convertibility of the Korean won in the offshore currency market cited as one significant setback.

Countries must remain on the watch list for over a year to be upgraded to a developed market, which means Korea needs to wait another year to be considered.

Meanwhile, the inclusion in MSCI's developed markets index is considered a positive factor for a country's capital flow, as it affects the investment decisions of global institutional investors.

Given MSCI's cautious note on the enhancement of South Korea's market accessibility, Samsung Securities analyst Kim Dong-young expressed a guarded outlook on next year's reclassification.

"Essentially, what MSCI is indicating is that they require tangible evidence of the impact of policy reforms before making a decision. Therefore, given the ongoing short selling ban until next March and other reforms still unfolding, the outlook for next year remains uncertain," Kim explained.