MSCI warns Argentina, Turkey could soon lose emerging markets status

One of the world’s largest benchmark index providers has warned Argentina and Turkey could soon be removed from the MSCI Emerging Markets Index should it become increasingly difficult for foreign investors to access their respective equity markets.

“While volatility increased dramatically due to the Covid-19 pandemic, global equity markets remained accessible and continued to function well, allowing issuers to raise capital and investors to manage risk during the crisis,” Dimitris Melas, global head of equity research and chairman of the MSCI Index Policy Committee, said in a statement on Tuesday.

However, two important emerging markets, Argentina and Turkey, “suffered substantial deterioration” in market accessibility over the last 12 months, Melas continued. “That could lead to their exclusion from the MSCI Emerging Markets Index.”

The MSCI Emerging Markets index is a benchmark used by many global funds and exchange-traded funds. It captures large and mid-cap representation across more than two dozen countries and is often used as a measure of equity performance in global emerging markets.

The warning comes shortly after talks between Argentina’s government and international creditors to restructure $65 billion in debt hit a roadblock, leaving a deal hanging in the balance.

Argentina tumbled into its ninth sovereign debt default on May 22 after it missed overdue interest payments.

The South American country also imposed stringent capital controls in September last year, following a historic stock market crash that led to a surge in foreign currency demand.

The MSCI, in its annual market classification review, said these capital controls were “making it impossible” for international investors to access the domestic equity market.

“The Argentinian authorities must realize that the prolonged application of capital controls or the introduction of further capital controls may force the reclassification of the MSCI Argentina Indexes from Emerging Markets status to either Frontier Markets or Standalone Markets status,” Sebastien Lieblich, global head of index solutions and chairman of the MSCI Equity Index Committee, said in a statement.

The MSCI said it would continue to consult with market participants on the classification of the MSCI Argentina Indexes as part of the index provider’s 2021 review.

However, any event that results in further deterioration of market accessibility would prompt the MSCI to remove the MSCI Argentina Indexes from the emerging markets index “as soon as practicable.”

The MSCI announced it is considering whether to launch a consultation on a reclassification proposal for the MSCI Turkey Index to Frontier Markets or Standalone Markets status “if the already deteriorating accessibility level of the Turkish equity market were to worsen further.”

The group said the accessibility level of the Turkish equity market had been “adversely impacted” by the introduction of short-selling and stock lending bans in October 2019 and February 2020, respectively.

MSCI also said it was reclassifying the Iceland index to Frontier Markets from Standalone Markets following the country’s decision to remove capital controls last year. This has made it easier for investors to access Iceland’s equity market, the group added.