Argentina Is Poised to Regain Emerging-Market Status, Itau Says

  • YPF, Banco Macro and Grupo Galicia meet liquidity requirements
  • MSCI to announce upcoming consultation schedule in June review

Argentina is set to recapture its emerging-market classification almost seven years after its equities were downgraded to frontier status when the country implemented capital controls, according to Itau BBA.

The reclassification by MSCI Inc., whose indexes are the benchmark for more than $9.5 trillion in assets worldwide, could bring a surge of capital into the local stock market from investors who wouldn’t put their money in a frontier market, a grade shared by Kazakhstan and Morocco, Ricardo Cavanagh, the head of equities at Itau for the Southern Cone and Andean region, said in an interview. While there is close to $2 trillion following emerging-market equities, there’s no more than $20 billion in frontier markets.

Equity trading in South America’s second-largest economy has shriveled since the downgrade from MSCI in 2009, and its total market capitalization of $44.1 billion is now one-ninth that of Brazil and smaller than Mexico, Chile, Colombia and even Peru. The capital controls implemented seven years ago -- specifically a rule that required 30 percent of incoming funds to put in an interest-free bank account for one year -- was undone this month by newly elected President Mauricio Macri, who campaigned on a pledge to restore growth by opening up the country’s markets and luring investors.

“Without the controls, Argentina’s main stocks are liquid enough to allow the country to be classified as an emerging market,” Cavanagh said. “This would be positive for Argentina because it would allow the country to gain access to the many funds that benchmark against the MSCI Index. Along with a return to capital markets, this change will bring a stronger investment cycle for Argentina.”

Macri is trying to jumpstart an economy that has been punished over the past 15 years by two defaults, a wave of nationalizations and currency and capital controls that dissuaded investment. The president allowed the peso to float freely on Dec. 17.

MSCI also requires that emerging markets have at least three companies that meet certain liquidity requirements and have a market value of at least $1.26 billion. According to Cavanagh’s analysis, YPF SA, Banco Macro SA and Grupo Financiero Galicia SA already meet the minimum requirements.

MSCI spokesman Paul Griffin said the process for an upgrade would begin with a lengthy consultation, usually a year long, that would be announced at the semi-annual index review in June. Even if the decision is to add the country to the index, the change would probably happen after an additional year, he said.

Cavanagh predicted in August that banks were poised to gain from a new presidency. Since then, Banco Macro has returned 38 percent, Grupo Financiero Galicia rallied 32 percent and BBVA Frances gained 24 percent in local-currency terms.

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