Once among the world’s richest countries, Argentina’s ignominious slide down the global rankings has continued with a looming downgrade from index provider, MSCI.
In a release last week, MSCI warned Argentina – a star economy in the early 20th century – could be ejected from its emerging markets index along with Turkey.
Dimitris Melas, MSCI global head of equity research, said the two mid-tier economies could be demoted to ‘frontier’ index status or further down as ‘standalone’ markets.
“In the last 12 months, two important Emerging Markets, Argentina and Turkey, suffered substantial deterioration in market accessibility that could lead to their exclusion from the MSCI Emerging Markets Index,” Melas said in the statement.
Such a move could see capital outflows from the two markets as investors rebalance benchmark-linked portfolios to reflect the new risk rankings.
While MSCI reprimanded Turkey for its ban on short-selling and stock-lending, Argentina is a more pressing concern for the index provider.
According to the release, the Argentina’s hard-line capital controls introduced last September were “making it impossible for international investors to access the domestic equity market”.
Sebastien Lieblich, MSCI global head of index solutions, said while the Argentine indices “remain replicable” as only offshore listings are included, “the imposition of the current capital controls is not in line with the market accessibility criteria of the MSCI Emerging Markets Indexes”.
“The Argentinian authorities must realize that the prolonged application of capital controls or the introduction of further capital controls may force the reclassification of the MSCI Argentina Indexes from Emerging Markets status to either Frontier Markets or Standalone Markets status,” Lieblich said.
MSCI has begun consulting with investors on the possible eviction of Turkey and Argentina from the emerging markets club in its 2021 index review. However, if market access continues to decline in those jurisdictions, the countries would exit the relevant MSCI benchmarks “as soon as practicable”.
The influential index giant also red-flagged Nigeria, Lebanon and Bangladesh for possible exclusion from its third-tier ‘frontier’ benchmarks.
“In the event of further deterioration of market accessibility, MSCI may reclassify the MSCI Nigeria Indexes, the MSCI Lebanon Indexes or the MSCI Bangladesh Indexes to Standalone Markets status as soon as practicable,” the release says.
Meanwhile, both Kuwait and Iceland move up the index ladder with the former jumping from its current frontier grading to emerging markets level as of November this year. Iceland, currently dwelling in the MSCI netherworld of ‘standalone’, moves to the frontier index next May after defrosting some capital controls.
“Based on the simulation using pro forma data as of June 18, 2020, this would lead to the inclusion of two securities in the MSCI Frontier Market Index (excluding Kuwait) with an estimated index weight of 5.24%,” the MSCI statement says.