* S.Korea, Taiwan remain under review for upgrade in 2012
* Market access, lack of FX convertibility in question
* Qatar, UAE may win emerging market status in December (Adds details on timing of UAE, Qatar possible upgrade)
By Walter Brandimarte
NEW YORK, June 21 (Reuters) - South Korea and Taiwan will only be able to join the ranks of developed markets in MSCI’s benchmark indexes after making their currencies fully convertible, the index provider said on Tuesday.
Both countries, which account for more than a quarter of the MSCI Emerging Market Index .MSCIEF, remain under review for a possible upgrade next year, MSCI Inc (MSCI.N) said in a statement.
For a table with country weightings in key MSCI indexes, see [ID:nN1E75K1MP].
South Korea and Taiwan have failed to pass the test for developed markets admission in the past few years due to market access issues. Both countries have had some degree of capital curbs in place, which were exacerbated in moments of market turbulence.
Some investors still expect both countries to be upgraded in the near future.
“Over many years, these countries have developed the economic infrastructure and management capabilities commensurate with the status of developed countries,” Mohamed El-Erian, co-chief investment officer of PIMCO, who oversees over $1.2 trillion, told Reuters.
Before that, however, MSCI wants to see full currency convertibility in South Korea and Taiwan, including active offshore currency markets.
“We are referring to the ability for international investors to trade the currency directly offshore, not through a non-deliverable forward system,” Remy Briand, global head of index research at MSCI, told reporters in a telephone conference.
“When you get into a NDF system, the logistics and the costs are very different. That’s not an issue in the context of emerging markets, but it becomes an issue in the context of developed markets.”
MSCI also delayed until December its decision on whether Qatar and the United Arab Emirates should be included in the emerging markets group, a promotion eagerly awaited by the two Gulf Arab states.
Qatar and the UAE, currently classified as frontier markets, have been under review for an upgrade for the past two years, but issues such as stringent foreign ownership limits and use of dual account structures have been delaying the move.
Both have implemented new systems to improve investor access to their markets, including a new delivery versus payment system in May.
MSCI welcomed the move, but said it will wait for market participants to provide feedback on the new payment system before making its decision later this year.
“That’s really why we have this extension (in the review period), in order for the various institutional investors to actually experience the trades and new settlements in the new system,” MSCI’s Briand said.
Qatar will only be accepted into the emerging markets group, however, if the government reduces limits to foreign ownership in its companies.
“Under current conditions, Qatar would not qualify for emerging markets,” Briand said.
If Qatar or the UAE are reclassified as emerging markets, that change would be implemented in MSCI indexes in November 2012, at the earliest, the firm said.
MSCI also said Egypt will remain classified as an emerging market country, despite the closure of its stock market for nearly 40 days during the protests that eventually topped the government of Hosni Mubarak.
“No major issues have been raised by international institutional investors with respect to the operational framework of the Egyptian Stock Exchange following its reopening,” MSCI added. (Additional reporting by Jennifer Ablan; editing by Diane Craft, Leslie Adler and Andre Grenon)