Greece faces downgrade as Qatar and UAE keep MSCI frontier status

Index provider MSCI will retain the frontier market status of United Arab Emirates and Qatar, despite the two countries’ efforts to align their markets with global standards.

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Index provider MSCI will retain the frontier market status of United Arab Emirates (UAE) and Qatar, despite the two countries’ efforts to align their markets with global standards.

MSCI, which performs a market accessibility review once a year and releases the results of the review in June, also placed its Greece index under review for reclassification from a developed to an emerging market. This is not due to the country’s potential exit from the euro, but because it does not meet developed market size standards with only two eligible constituents, and because Greek authorities have failed to bring equity market regulations in line with other developed markets, according to MSCI. 

Low foreign ownership limits is the only issue keeping Qatar from being updated to emerging market status, MSCI says. This limits the shares available to foreign investors – by MSCI’s count, the total free float adjusted market capitalisation of the Qatar index available to foreign investors is US$10 billion.

But MSCI review did laud the false trade mechanism introduced by Qatar in May 2012 as it eliminates the need for a dual account structure and guarantees the safeguarding of investors’ assets. 

The UAE, meanwhile, will remain a frontier market “as no enhancements with respect to the operational issues mentioned in the last review are expected to be implemented in the United Arab Emirates before 2013.” 

A proper false trade mechanism, as well as a formal introduction of regulation governing securities borrowing and lending agreements, are both needed before the UAE can be upgraded to emerging market status, MSCI says. 

Qatar approved securities lending and borrowing earlier this month. 

“International institutional investors often establish segregated custody and trading accounts in Qatar and in the UAE,” the review says, “to mitigate the risk from local brokers having unlimited access to the trading accounts. This dual account structure results in significant operational burdens associated with the need to transfer shares from one account to the other prior to trading.” 

Arindam Das, regional head of HSBC Securities Services, EMEA, says that while the retention of frontier market status by Qatar and the UAE was the generally expected outcome, there are several positives that need to be highlighted. “MSCI has noted the new 'false trade' initiative introduced by Qatar, which, if successfully implemented, would obviate the need for the dual account structure, leaving the foreign ownership limit (FOL) the only significant hurdle that needs to be overcome,” he said.

“Regarding UAE, since the FOL issue is not there, the only issue that needs to be addressed is the need for the dual account structure. It would appear that if they introduce a process similar to what Qatar has done, and it addresses the concerns of clients on asset safety, this, coupled with the successful implementation of stock lending, would make the upgrade a distinct possibility in June 2013. However, the key will be the markets' ability to introduce these changes well in time for investors to become familiar with the new processes and derive adequate comfort before the next review in June 2013; otherwise the upgrade may remain elusive despite the markets taking all the right steps.” 

No markets changed their status in the 2012 MSCI review. Korea and Taiwan are still under review for a reclassification from emerging to developed markets due to a lack of currency convertibility, lack of offshore markets currency trading, and rigid identification systems making in-kind transfers and off-exchange transactions difficult to execute. 

Morocco is being reviewed for a reclassification from emerging to frontier market, following a significant decrease in liquidity since 2008 and a subsequent reduction of constituents. Currently, the market has only three eligible constituents, one of which – Maroc Telecom – had its weight reduced by 50% due to low liquidity. 

The MSCI conducts its accessibility review annually to “reflect international investors’ experience in investing in a given market and provides a detailed assessment of market accessibility for each country market included in the MSCI Indices”. 

It evaluates listed markets on 18 measures in the following criteria: openness to foreign ownership, ease of capital inflows and outflows, the efficiency of the operational framework, and the stability of the institutional framework.

The complete result of the review can be found on MSCI’s Web site. 

Reporting by Ole Skaar, Global Custodian, an Asset International publication.