Argentina wins back emerging market status from MSCI
Index provider MSCI has promoted both Argentina and Saudi Arabia to its flagship emerging markets indices, which could presage a torrent of investor money into their local stock market that track the benchmarks.
For Argentina, the upgrade from “frontier market” status represents a symbolic victory in reformist president Mauricio Macri’s efforts to turn one of Latin America’s perennial basket-cases into a more “normal” country once more. For Saudi Arabia it reflects the country’s gradual attempts to open itself up to foreign investors.
Inclusion into a major benchmark can have a big impact on markets, as trillions of dollars are tied to the biggest indices controlled by MSCI, S&P Dow Jones Indices and FTSE Russell. JPMorgan estimates that there is about $384bn of money that passively tracks MSCI’s emerging markets indices, and another $1.1tn that is benchmarked against them.
Argentina was downgraded from emerging market status by the index provider in 2009. MSCI said that investors had hailed the country’s political turnround, but cautioned that its decision could be altered if the government imposed any kind of capital controls in response to recent financial market turmoil.
A sharp decline in the peso forced the Buenos Aires government to tap the International Monetary Fund for a $50bn bailout that was finally approved on Wednesday.
International institutional investors expressed their confidence in the country’s ability to maintain current equity market accessibility conditions, which is a key factor in MSCI’s classification framework. However, in light of the most recent events impacting the country’s foreign exchange situation, MSCI also clarifies that it would review its reclassification decision were the Argentine authorities to introduce any sort of market accessibility restrictions, such as capital or foreign exchange controls.
Saudi Arabia’s accession to the MSCI EM index also represents a fillip to the Gulf country’s attempts to gradually open itself up to international investment — an important plank in Crown Prince Mohammed bin Salman’s reform drive.
MSCI will give Saudi Arabia a 2.6 per cent weighting in its index, following a two-step inclusion process that will happen in May and August next year. The index provider added:
This decision follows the implementation in the Saudi Arabia equity market of a number of regulatory and operational enhancements which effectively increased the opening of the market to international institutional investors. The proposal for inclusion received the support of the vast majority of international institutional investors that participated in the consultation.