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Argentina misses out on MSCI upgrade to emerging market status

Argentina failed to win back its status as an emerging market in the influential MSCI benchmark equity index, triggering a sell-off in Argentine equities.

Argentina’s Merval stock index dived by more than 5 per cent in early trading on Wednesday, after more than doubling since President Mauricio Macri took office 18 months ago, largely in anticipation of an upgrade from its current status as a frontier market.

The peso also plumbed record lows, falling around 2 per cent, although businesses complaining that the currency is too strong due to heavy capital inflows over the past year cheered gains in competitiveness.

Index provider MSCI late on Tuesday judged it too soon to promote Argentina, despite widespread investor expectations that it would be upgraded because of a host of market-friendly policies that Mr Macri has implemented with the aim of opening up Argentina’s economy.

Argentina will now remain relegated to the ranks of frontier markets for at least another year. 

MSCI’s decision contrasted with the success of Argentina’s issuance on Monday of a $2.75bn 100-year bond.

More than three times subscribed, the issue came little more than a year after the country’s triumphant return to the international capital markets after more than a decade of isolation. 

“Although the Argentine equity market meets most of the accessibility criteria for Emerging Markets, the irreversibility of the relatively recent changes still remains to be assessed,” MSCI said in a statement.

MSCI was referring to the removal in December 2015 of foreign exchange restrictions, whose implementation in 2009 by the previous populist government was the original cause for Argentina’s downgrade to frontier market status.

It noted that this removal had already had positive effects, such as the floating of the country’s currency, but implied that further assurance was needed that these changes would remain. 

An MSCI upgrade would have immediately created a far bigger pool of assets that could potentially invest in Argentina.

As much as 100 times more money tracks emerging markets than frontier markets, which tend to be less highly valued owing to greater political instability, elevated currency risk and lower liquidity.

The list of frontier markets includes Romania, Kazakhstan, Nigeria, Kenya, Kuwait, Bangladesh and Vietnam.

Officials had hoped that an upgrade would benefit Argentine companies by lowering the cost of raising capital, as well as supporting economic growth, which is slowly rebounding after five years of stagnation.

The government is expecting growth of around 3 per cent this year, after a contraction of more than 2 per cent last year, while inflation has almost halved from a high of around 40 per cent last year.

Many investors are waiting to see the results of important midterm legislative elections in October.

A strong show of support for the ruling coalition will enable the government to press on with its economic reform programme, including tax reform aimed at improving competitiveness.