Argentina Protests: What Criteria Does MSCI Use to Classify A Nation As Emerging or Frontier? 1

Protestors not happy with government

The wave of reform policies initiated by President Mauricio Macri have come as a jolt to Argentinians who have been accustomed to subsidies and a protectionist regime for over ten years. Though the new economic policies have shown signs of being beneficial, for the people, it seems it’s all too much to cope with at one go.

The protests took place when Argentina (ARGT) was hosting probable investors and other delegates at the World Economic Forum meeting. Though international financiers have been largely pleased with reform measures like reduction in gas and electricity subsidies, the resulting increase – which in the case of electricity prices has been up to 500% – has led to local labor unions demanding higher wages.

Will these protests negatively impact Argentina’s hopes for higher foreign investment and an upgrade to emerging market status by MSCI?

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Reforms a good move

Ratings major S&P Global recently upgraded Argentina’s credit rating to ‘B’ from ‘B-‘ in light of the government’s efforts to address issues facing the economy. The agency expects inflation to decline to 20% in 2017 and sees economic output rising by 3% over the next three years.

Meanwhile, the Wall Street Journal quoted Ramzi Sidani, senior frontier markets fund manager at HSBC, saying that “Inflation is normalizing (relatively, in Argentinian terms) and the country has exited the recession,” thus indicating his positive outlook on the economy.

But will Argentina receive an upgrade in status?

Argentina is up for a possible upgrade by MSCI to an emerging market later this year. Index provider MSCI had downgraded the country to a frontier market in 2009.

But do mass protests have the ability to cast the country in negative light when it comes to an upgrade?

Possibly not.

The table above lists the criteria that MSCI looks at while classifying a nation as a developed, emerging, and frontier market.

Bloomberg has reported a study by Itau BBA which shows that Argentine companies YPF SA (YPF), Banco Macro SA (BMA) and Grupo Financiero Galicia SA (GGAL) already meet the company and security size criteria. The country has also done away with capital controls. And since sustainability of economic development is not a criteria for an emerging market, it looks like the country is well on its way to being classified again as such.

Where these protests can be hurtful, though, is the ability of the government to push through further reforms. The upcoming elections in October will be a litmus test for the government, which will not only prove its popularity, but also its future ability to continue opening up the economy to foreign capital.

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