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ARGENTINA'S ROAD BACK TO MSCI IS NO STRAIGHT LINE

Investor speculation is building over whether Argentine equities could be considered for inclusion on an MSCI watchlist ahead of the index operator's annual review next month.

The Latin American country has seen a recovery since President Javier Milei took the reins in 2023, with stocks jumping over 300% since and the economy posting fiscal and trade surpluses, aided by austerity measures and efforts to boost forex reserves through exports.

However, given the country's debt default history and volatility, skepticism remains over whether the index provider would be willing to put its reputation on the line.

"You never as an index provider want to have a company or a country be demoted and then be added back. So when changes are made, especially at the country level, they have to be pretty well thought through," said Alex Matturri, former CEO at S&P Dow Jones Indices.

Analysts are also divided over whether it would be re-classified as a frontier or emerging market, although the timeline for a full inclusion would stretch over a couple of years and could also depend on capital market accessibility.

It is not the first time investors have speculated about a potential re-classification. Two years ago J.P.Morgan said the country's equities could see about $1 billion in total inflows in the event of it being upgraded to emerging markets.

MSCI downgraded Argentina to a standalone market in 2021 due to strict capital controls imposed from 2019, following an earlier period of turbulence after then-President Mauricio Macri’s rapid easing of those controls backfired amid aggressive U.S. Federal Reserve rate hikes in 2018.

However, this time around Milei's government is cautious, focusing on attracting foreign direct investment, while the peso ARS=RASL has weakened since transitioning to a managed float last year.

Capital inflows following index inclusion would strengthen the local peso, disadvantage exporters and limit forex reserve accumulation.

"One could do a really interesting political economy analysis in terms of the firms in Argentina that stand to gain from index inclusion versus the firms that stand to lose from currency appreciation and sort of think about who has the government's ear," said Layna Mosley, director of the Princeton Sovereign Finance Lab at Princeton University.

The added risk is also that Federal Reserve officials are now open to potentially hiking rates to battle energy inflation pressures, which could further strengthen the dollar and weigh on emerging markets broadly.

(Johann M Cherian)

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