Argentina to Be Cut to ‘Frontier’ Market at MSCI

By James Attwood

Feb. 19 (Bloomberg) -- Argentina will be downgraded to “frontier” from “emerging market” status by MSCI Barra on the Latin American country’s restrictions on capital flows.

MSCI will reclassify Argentina to the MSCI Frontier Markets Index from the MSCI Emerging Markets Index at the end of May, the company said in an e-mailed statement distributed today. Only American depositary receipts will be eligible for inclusion, the statement said.

“Argentina has been on the back burner for quite a while,” said Roberto Lampl, who helps manage $12 billion in emerging- market assets at ING Investment Management in The Hague. “We’ve seen government policies that haven’t benefited minority investors and haven’t seen much that has improved traction for foreign direct investment.”

MSCI said in June it would consider demoting Argentina and Colombia unless they cut capital flow restrictions. Since 2005, Argentina has required that foreigners deposit 30 percent of their stock investments with the central bank for a year to limit speculative inflows. Colombia removed restrictions on foreign investments in the local equity market last year.

Merval’s Decline

Argentina’s benchmark Merval Index has lost about half its value in the last year as the global financial crisis and President Cristina Fernandez de Kirchner’s seizure of $24 billion of private pension funds undermined investor confidence.

Tenaris SA, which accounted for about 70 percent of the MSCI Argentina country index, switched to the MSCI Italian index in November as trading volume rose in Milan and fell in Buenos Aires. In the same month, Citigroup Inc. equity strategist Geoffrey Dennis cut his recommendation for Argentina to “zero” from “underweight.”

Tenaris and the depositary receipts of Brazil’s Petroleo Brasileiro SA account for half of the Merval index of 14 Argentina stocks. Listed stocks in Buenos Aires had dropped to 82 as of November from a record 669 four decades ago.

Argentina’s private pension funds held about a quarter of shares available for public trading in Argentina, data compiled by the companies show.

Argentina’s six-year-old economic expansion is slowing as the global recession curbs demand for the country’s commodity exports. South America’s second-biggest economy grew 4.9 percent in the fourth quarter, the weakest pace since 2002, when the economy contracted 3.4 percent in the aftermath of the government’s $95 billion bond default.

The MSCI International Equity Indexes are estimated to have over $3 trillion benchmarked to them, according to the company.

MSCI also said it will begin consultations on a proposal to include Pakistan in its Frontier index.

To contact the reporters on this story: James Attwood in Santiago at jattwood3@bloomberg.net