MSCI returned Argentina to emerging market status for the first time in nearly a decade, a move that is expected to provide a much-needed boost to the beleaguered country as it struggles to maintain credibility with investors after a widespread selloff in its currency.

Inclusion in the index is expected to draw billions of dollars in passive investment into Argentina’s stock market at a time of vulnerability. The MSCI Argentina index is down 37% this year, the peso has fallen 33% against the dollar and Argentine bonds have dropped 14%.

Separately, MSCI said it would add Saudi Arabia to the emerging markets index, a move that could attract tens of billions of dollars in foreign investment to the stock market. It also provides a vote of confidence for the Saudi stock market as the government considers taking public the giant state-owned oil company, known as Aramco.

Both countries will officially join the emerging-markets gauge in May 2019, MSCI said Wednesday. Only foreign listings of Argentine companies will be included initially. Argentina had previously been classified as a frontier index and Saudi Arabia was a stand-alone index.

Morgan Stanley estimates the MSCI move could boost Argentine share prices by 20% over the next four months, based on $4 billion in fresh inflows. But if MSCI had excluded the country from its emerging markets index, that would have triggered another 6% decline in the market, the bank said.

Argentina still faces an uphill battle as it contends with higher interest rates in the U.S., a rising dollar and other market dynamics that could turn investors away from riskier assets. Some analysts say that runaway inflation and high local interest rates could lead the country into a recession.

MSCI said that investor confidence in Argentina’s ability to maintain accessibility to the country’s stock market was a key factor in the decision. MSCI also warned that it would review the reclassification were Argentine authorities to introduce market accessibility restrictions, such as capital or foreign exchange controls.

In 2017, MSCI delayed the upgrade based on investor concerns that recently implemented market accessibility improvements needed to remain in place for a longer time period to be deemed irreversible. “There were several positive arguments for the reclassification,” said Diego Celedon, equity strategist for the Andean and the Southern Cone at JPMorgan Chase. “The market wanted more certainty that the changes this administration was making were irreversible. The changes are still in place one year later.”

The country was largely expected to qualify for the upgrade before a selloff in its currency spooked investors out of the market and pushed the country’s President Mauricio Macri to turn to the IMF for a bailout. Just days before the decision, investors said it was unclear whether MSCI would be willing to take the risk on beleaguered Argentina.

The country was the darling of the markets last year amid a new reform-minded government that resolved a longstanding dispute with creditors over a 2001 default. Argentina’s dramatic return to the international markets included selling a 100-year bond to creditors who until recently had viewed the nation as a serial defaulter and a pariah.

But in April when the dollar turned higher and U.S. interest rates climbed, the markets turned on Argentina. The central bank began selling off its reserves to support a sagging currency and a series of communication missteps on the part of the central bank sparked concerns among investors that the government could delay fiscal changes that are unpopular among Argentines.

MSCI isn’t a legal body. Its decisions are made based on technical issues aimed at ensuring market access for investors. The firm solicits input from investors who track its indexes. Confidence that a country can maintain investor-friendly policies remains key to any upgrade.

Argentina was downgraded to a frontier economy in 2009 because the government had instituted capital controls that made it difficult for foreign investors to enter and leave the equity market.

Beginning in December 2015 when the country’s business-friendly president, Mr. Macri, came to power, the Argentine Central Bank moved to abolish foreign exchange restrictions, allowed its currency to float and eliminated monthly repatriation limits and lock-up periods that made it difficult to for investors to get dollars out of the country.

Date: 20 June 2018