June 20, 2018 / 11:24 PM / a year ago

Argentina MSCI upgrade could lower credit costs, minister says

BUENOS AIRES, June 20 (Reuters) - Argentina’s upgrade to emerging market status by index provider MSCI on Wednesday could lower the cost of borrowing, its treasury minister said, as the decision likely paved the way for a jump in its stocks, bonds and currency.

MSCI said on Wednesday that it would reclassify Argentina as an emerging market and begin including Saudi Arabia in that classification, sharply broadening the investor base for both countries in a move that could be supportive of their equity markets.

For Argentina, the announcement came as a welcome respite from months of dismal economic news.

The market-friendly presidency of Mauricio Macri is seeking to halt a devastating run on the peso currency, which prompted the government to turn to the International Monetary Fund (IMF) for financing.

The peso touched record lows last week, and bond yields on Tuesday briefly hit their highest levels since Macri took office in 2015. Financial markets in the South American nation were closed on Wednesday for a national holiday.

Treasury Minister Nicolas Dujovne said the upgrade could mark a turning point in the recent selloff.

“Being emerging markets will help give us access to cheaper capital and as a result, more investment and growth,” Dujovne said in a statement.

Argentina was downgraded to frontier market status in 2009 after former populist President Cristina Fernandez imposed capital controls. Markets widely expected an upgrade last year after Macri ended those controls and implemented free-market reforms but MSCI said at the time it wanted evidence those changes were “irreversible.”

Since then, Congress has passed a capital markets overhaul to reduce the power of market regulators and loosen restrictions on some funds investing in Argentina, while the administration has passed a rule allowing short-selling.

The upgrade paves the way for lower-risk funds that track emerging market indices to invest in the country’s stocks. That could mean an inflow of $3.3 billion between active and passive funds, according to J.P. Morgan.

It could also pave the way for more Initial Public Offerings (IPOs), after several listings of Argentine stocks abroad performed below expectations or were delayed due to volatility earlier this year, said Jeffrey Lamoureux, senior country risk analyst for Latin America at BMI Research in New York.

The upgrade “bodes very well” for small-cap oil company Madalena Energy’s planned listing on the Buenos Aires bourse, said David Tawil of Maglan Capital, the company’s largest shareholder. (Reporting by Luc Cohen and Jorge Otaola Editing by Daniel Flynn and Rosalba O’Brien)

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