MSCI Barra reclassifies Jordan and reviews other countries

Jordan to step down to frontier market status in November. Israel, South Korea Kuwait, Qatar, and the UAE are under consideration for upgrades, while Argentina and Colombia could be downgraded.
Global index provider MSCI Barra has announced a change to its classification of markets in its MSCI equity indices as well as adjustments that are under consideration following discussions with the investment community.

MSCI Barra will reclassify Jordan as a frontier market at its semi-annual index review in November from its current emerging market status. It is starting consultations in July on proposals to upgrade Israel and South Korea to developed markets from their existing emerging market status and Kuwait, Qatar and the United Arab Emirates to emerging markets from their current frontier market status. It is also considering downgrading Argentina and Colombia to frontier markets from their current emerging market status unless significant improvements in the relevant capital flow restrictions are observed.

MSCI Barra will reclassify Jordan to a frontier market because the majority of the constituents of the MSCI Jordan Index do not meet the minimum size and liquidity requirements set for the emerging market indices.

In consulting with international institutional investors about Israel, South Korea, Kuwait, Qatar and the UAE, MSCI Barra will focus on the suitability of such reclassifications and on the potential transition timelines. It will also actively solicit feedback from authorities and regulators, except in Israel, to understand their intentions, implementation plans, and timetables with respect to the remaining improvements in the current market accessibility framework. Many international institutional investors remain concerned with the lack of full convertibility of the Korean won, including the lack of an efficient offshore market for the currency. MSCI Barra intends to announce its final decision on the potential reclassifications based on its consultation no later than June 2009.

If no significant improvements in terms of restrictions of inflows and outflows of capital are observed in Argentina and Colombia by year-end, MSCI Barra will consult with market participants in January-February 2009 on a proposal to reclassify these markets in time for the May 2009 semi-annual index review.

MSCI BarraÆs decisions take into account the feedback it received on the market classification discussion paper published in January 2008. The feedback from the institutional investment community on the emerging and developed markets classification centred on the balance between a countryÆs economic development and the accessibility of its market, including the efficiency of its operational framework, and the role of geo-political risk.

One main conclusion from the discussion is that a more appropriate market classification approach is one that emphasises the advancement of the economy jointly with a reasonable level of overall market accessibility rather than one that focuses mainly on the presence of a highly efficient operational framework.

While international institutional investors believe that geo-political risk is an important factor in market classification, the feedback suggests that the difficulty in assessing this factor makes it unsuitable for use as a pass-or-fail dimension for the classification of a country as a developed market.

In the frontier and emerging markets classification framework, the feedback suggests placing greater emphasis on the role of market accessibility for classification as an emerging market, but with attention to preserving index stability as much as possible.

Meanwhile, FTSE CEO Mark Makepeace has said South Korea will likely join Asian stock markets such as Hong Kong and Singapore in FTSE GroupÆs developed market classification at the index providerÆs next review in September. South Korea and Taiwan, both classified as emerging markets by FTSE, were placed on a watch list for possible upgrade to developed market status three years ago. While both are already considered developed countries by the World Bank, they are still classified as emerging markets by FTSE and MSCI Barra. FTSEÆs classification is based on a countryÆs economic status and on requirements related to how easily investors can have access to and divest from its market.

South Korea failed to meet three requirements during FTSEÆs latest country classification review. It didnÆt have in place a ôfree and well-developedö foreign exchange market, free delivery settlement, and off-exchange transactions at the time of the review.
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