If Argentina Wants Emerging-Market Status, It Must Avoid Capital Controls

If Argentina Wants Emerging-Market Status, It Must Avoid Capital Controls

17/05/18 - 14:03 - Volatility in Argentine peso ‘creates noise’ for decision. MSCI delayed decision to upgrade Argentina last June.

Argentina’s long-awaited upgrade to emerging-market status hinges on whether President Mauricio Macri can resist the return of capital controls he erased since taking office, according to MSCI Inc., the index provider set to decide on the promotion as soon as next month.

Macri swept into office in late 2015 vowing to undo years of restrictive policies, aiming to jump-start investment and growth. He took the first step within a week of taking office, allowing the peso to float freely. While a resumption of capital or currency controls hasn’t been mentioned during the peso’s current swoon, MSCI cited them in 2009 as one reason it dropped Argentina to "frontier" status alongside the likes of Mauritius and Kazakhstan.

"What would impact the reclassification is if, as a consequence of the foreign-exchange crisis, the government were to consider reintroducing capital controls," Sebastien Lieblich, MSCI’s global head of index management research, said in an interview. "We assess the accessibility of the equity market. As long as the accessibility is not impaired, there is no reason for us to take any action.”

Treasury Ministry spokesman Sebastian Tabakman declined to comment on whether Argentina’s government would consider reintroducing capital controls.

MSCI delayed a reclassification decision just shy of a year ago, saying it needed to assess "the irreversibility of the relatively recent changes," including the rule that portfolio inflows must stay in-country for at least 120 days. During the past year, the nation’s stock exchange has also implemented rules to allow short-selling.

Argentina’s chances for an upgrade have improved since the delay, JPMorgan analysts wrote in February, especially after Macri’s performance in midterm elections solidified his policies, estimating that inflows from an upgrade could surpass $5.5 billion. But that was before the peso cratered, forcing the government to spend a 10th of its foreign exchange reserves, hike interest rates to 40 percent and seek help from the International Monetary Fund.

Reclassification is a two-part process. Once a country meets requirements set by MSCI that relate to market accessibility, operations and efficiency, the second stage involves receiving investor feedback, Lieblich said. MSCI can still overrule the viewpoint of money managers when making its ruling.

"On the methodological criteria, Argentina is completely on track to be an EM constituent," Lieblich said. "Now it will depend on the experience of investors to see if they do agree that our requirements are fulfilled and it’s the right time. The overall situation -- I don’t want to say it raises concerns-- but it might raise questions."

— With assistance by Pablo Rosendo Gonzalez

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