Argentina, wait a little longer…

Argentinean economists have been eagerly awaiting for 20 June to come.

Why?

Well, on that day, Argentina had the possibility of recovering its ‘emerging market’ membership — something it had lost in 2009, when it became a frontier market.

What’s the difference between a frontier and an emerging market?

Basically, a frontier market is a less developed market. Usually these countries are a riskier place to invest, but they also have the potential for higher returns.

You see, 20 June was the day when Morgan Stanley Capital International (MSCI) would be announcing the results of the 2017 Market Classification Review. In it, MSCI was not only revising Argentina’s status, but also reviewing Nigeria’s, China’s mainland listed stocks — also called A share — and Saudi Arabia’s.

Well, 20 June came and went.

After three years of rejections, China’s A shares are to be included in the MSCI Emerging Markets Index.

MSCI is also launching a consultation for the potential inclusion of Saudi in the index, and Nigeria will get a decision later this year.

Yet, in regards to Argentina, MSCI told the country ‘not yet’.

It will need to wait another year, until the 2018 Market Classification Review.

Even though Sebastien Lieblich, MSCI’s Global Head of Index Management Research, thinks ‘all ingredients are there’, MSCI wants to wait and see ‘whether these ingredients will be maintained over time.

As MSCI explained in its press release:

Since December 2015, the Argentinian Central Bank has abolished foreign exchange restrictions and the capital controls that had been in place for a number of years. These changes have resulted in, among other things: (1) a floating currency, (2) the elimination of cash reserves and monthly repatriation limits affecting the equity market and (3) the abolishment of the capital lock-up period for investments.

Although the Argentinian equity market meets most of the accessibility criteria for Emerging Markets, the irreversibility of the relatively recent changes still remains to be assessed.

The decision surprised investors, who had widely expected the MSCI to revert its decision.

In the last 18 months, Argentina has gone through a massive political and economic change. Back in 2009, Argentina was downgraded due to the application of foreign exchange and capital controls implemented by then president Cristina Fernandez de Kirchner.

In December 2015, the more market-liberal Mauricio Macri, leader of the movement ‘Cambiemos’ (Spanish for ‘let’s change’) took over the presidency. He has opened markets, liberalised the exchange rate, and removed export taxes and subsidies.

Since then, the Buenos Aires Stock Exchange (MERVAL) has soared about 80% higher, as you can see in the graph below:

 

Merval Exchange

Source: Bloomberg

Yet, as MSCI said, changes in the country are relatively new, and Argentina has a lot to prove considering its economic history.

Argentina has been recently affected by the current political crisis in Brazil, yet the country is also facing several challenges.

One is the upcoming October election. Macri currently holds a minority in Congress and needs a majority to continue implementing policies.

Argentina is also still waging battle with high inflation, which is currently at a high 24%, albeit lower than last year’s 40%. Just think about it. With such high inflation rates, new mortgages are running at 27.5-30% interest… Can you even fathom this in Australia?

Another problem is that the currency, the Argentinean peso, remains too strong, which is making some businesses in the country lose competitiveness. This is the consequence of a high inflation rate and a low dollar. In fact, Argentina is the most expensive country in Latin America.

This past Monday — ahead of MSCI’s decision — Argentina made a surprising announcement. It issued US$2.75 billion in bonds, enticing investors in a low-growth world with a 7.9% yield.

Yet, the shocking thing was the length of the bond, which will be maturing in…100 years. Yep, you heard right. One year after coming out of default, Argentina is looking for investors who are prepared to invest in Argentina for the next 100 years.

Are investors ready to invest for that length of time after Argentina’s turbulent economic and political history?

Only time will tell, but MSCI is not ready just yet to trust the country.

Argentina, wait a bit longer..


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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