The national government received a timely boost this week after global index provider MSCI decided to promote the country to its flagship emerging market indices, broadening the investor base for Argentina in a move that could be supportive of local equities.
Members of President Mauricio Macri’s administration hailed the decision, saying it would open the door to new streams of capital and investment for Argentina.
The reclassification represents a symbolic victory for the government and comes after the country being downgraded to frontier market status in 2009. Now, thanks to the move, up to US$7 billion could come into the country and help grow the local market, analysts predicted this week.
“Being an emerging market will give us access to cheaper capital and consequently more investment, growth and employment for all,” Treasury Minister Nicolás Dujovne said. “We were downgraded in 2009 due to bad policies that caused isolation and stagnation.”
Newly appointed Central Bank head Luis Caputo said the reclassification was “hugely important news” for Argentina, saying the decision showed the “importance of creating long-term trust in the economy, politics and the Judiciary.”
Argentina will officially join the emerging-markets gauge in May 2019, MSCI said. Only foreign listings of Argentine companies will be included initially.
While highlighting renewed investor confidence in Argentina, MSCI warned that it would review the reclassification if authorities introduced market accessibility restrictions.
“International institutional investors expressed their confidence in the country’s ability to maintain current equity market accessibility conditions, which is a key factor in MSCI’s classification framework,” the index provider said on a press release.
The reclassification could have a big impact on markets, with trillions of dollars tied to the biggest indices controlled by MSCI, S&P Dow Jones Indices and FTSE Russell. There is around US$384 billion in capital that passively tracks MSCI’s emerging markets indices, according to data from the JP Morgan financial services firm.
“The decision can change the overall feeling toward Argentina, which was highly negative. Local shares were trading at stress levels with important declines. It was way too negative for the real situation of the country. We aren’t in such a bad shape as was seen by the market,” said Marcos Buscaglia, partner at Alberdi Partners.
Expectations were initially high regarding a promotion on the index but the steep devaluation of the peso on the last few weeks raised doubts among investors.
The decision by MSCI was the second piece of major positive economic news for government in 24 hours, arriving on the same day that the International Monetary Fund’s executive board rubberstamped its US$50-billion deal with Argentina.
“There will be more stability on the exchange rate and the stock market will be on the rise. Those who chose to invest in US dollars may now think twice, to get a larger profitability in pesos,” said Alejandro Bianchi, investment manager at Invertir Online.
Local business leaders welcomed the decision, claiming it would prompt greater confidence in the economy and larger possibilities of investment, both financial and productive. Crucially, they said it would also reduce the costs of funding for both the country and its firms.
“It’s a very positive news. It means recovering trust and it can attract more funds through bonds. But also companies can benefit, as funding from abroad will be cheaper,” said Miguel Acevedo, president of the Argentine Industrial Union (UIA).
Daniel Funes de Rioja, UIA vice-president and head of the Food and Beverage Industries Coordinator (COPAL), said the decision means “more trust in the country” anticipating more investment.
For its part, the Argentine Trade Chamber (CAC) said on a press release that the reclassification will “encourage the development of the local market capital and allow Argentine companies to access better funding conditions.”
“This new context opens up an opportunity to expand the economic potential of the country, which requires reducing the inflation rate and the public spending, increase exports and achieve a larger technological development,” CAC said.