Argentina loses emerging market status on FX controls

Argentine stocks were cut from emerging market status by index provider MSCI Inc on the country’s continued capital controls.

The downgrade to “standalone” status, which comes just three years after the index provider raised the country’s shares from frontier to emerging-market status, was prompted by Argentina’s ongoing capital controls, according to a statement published Thursday evening. The world’s largest index provider had signaled last year that Argentina could lose its standing if controls remained or increased.

“Since September 2019, international institutional investors have been subject to the imposition of capital controls in the Argentina equity market,” said Craig Feldman, global head of index management research and member of the MSCI Index Policy Committee, in the statement. “The prolonged severity of capital controls with no resolution is not in line with the Market Accessibility criteria of the MSCI Emerging Markets Index.”

The MSCI Standalone Market Indexes are not included in the MSCI Emerging Markets Index or MSCI Frontier Markets Index. Countries currently in that category include Panama, Lebanon, Palestine, Ukraine, Botswana and Zimbabwe.

The change will take effect in the November 2021 semi-annual index review, the statement added.

‘Not a positive’

The decision is expected to lead almost US$610 million to pull out of the three remaining companies in the MSCI Argentina index, according to JPMorgan estimates. Because the stocks were left as “standalone,” rather than frontier status, there won’t be any inflows to mitigate that exit, the analysts added.

“The new friends of the standalone neighbourhood don’t inspire confidence in the investment community” said Joaquin Bagues, head strategist at Portfolio Personal Inversiones in Buenos Aires. “It’s not a positive decision for Argentina from all points of view.”

Argentina has intensified capital and currency controls since President Alberto Fernández took office at the end of 2019. The country, which last year restructured US$65 billion of overseas debt, remains locked out of foreign debt markets and has bolstered measures to keep scarce dollars within the country. While its foreign reserves recently got a boost from a rally in agricultural commodity prices, the country still has to face large loans from international lenders such as the International Monetary Fund and the Paris Club.

The MSCI Argentina index is up 4.8 percent since the beginning of the year, but has underperformed the MSCI Latin America index, which has gained 10 percent. Globant SA, Adecoagro SA and YPF SA are the only stocks that continue to be part of the index, as MSCI removed others following a stock rout that decimated traded volumes.