After a moderate recovery in the week leading up to the June 20 festivities, during which MSCI announced the MSCI Argentina Index would not be included in the MSCI Emerging Markets Index portfolio, the local equity market suffered a significant sell-off once it reopened. Since 2009, when significant capital flow controls where established, Argentina has been classified as a “frontier” market by MSCI. The 4.8% drop in the Buenos Aires Stock Exchange Merval Index was the largest in over a year, and it set a new record for equity trading volume (ARS 1,083 million or about USD 66.2 million).
Being classified as an “emerging” market is not only significant as a matter of status. Should MSCI include Argentina in this category, hedge funds and ETFs which track the Emerging Markets Index (and which hold over 1 trillion dollars in assets ) would need to acquire local equity, boosting market activity.
So, which requirements are yet to be fulfilled for Argentina’s equity market to be included in this group, which includes neighbors Chile, and Brazil, as well as recently inducted China?
According to MSCI’s proposal for reclassification published in June 2016 , since December 2015 there had been significant developments in the removal of restrictions to capital flows, which include:
• Reduction of minimum period during which investments must remain in the country from 1 year to 120 days.
• Removal of 30% mandatory cash deposits applied to USD inflows.
• Removal of maximum limit for repatriation of funds from the sale of equities (USD 500,000 per month)
• Approval from the Central Bank for repatriation of funds is no longer required.
However, there still existed significant obstacles to market accessibility by foreign investors, such as:
• All documents required for investor registration must be filed in Spanish and full process can take up to ten days.
• Detailed stock market information is not always disclosed in English.
• Lack of a real Delivery vs Payment (DvP) system and overdraft facilities in the Buenos Aires Stock Exchange.
• Existence of instances of government intervention that challenged the stability of the “free market” economy, including with respect to investment activities of foreign investors.
According to the latest consultation document published on June 20 , the only other significant piece of reform made since has been the effective elimination of all restriction on capital flows once the minimum period during which investments must remain in the country was totally removed. Besides the deficiencies mentioned in the previous market review, the new document adds the following hindrances to the reasons why Argentina is not classified as emergent:
•Lack of an efficient offshore currency market.
•Lack of nominee status in the market.
To pin the uncertain political scenario as we come close to legislative elections as the sole responsible of Argentina’s exclusion from emerging markets is a simplistic view that does not hold water in light of the structural weaknesses stated above. Solving these issues will lead to a virtuous cycle as more foreign investors will be attracted by our equity markets and in turn lead the way for their reclassification to the “emerging” status.