LatinFinance - March/April 2016 - 52

Peru politics
Presidential prospects

INVESTOR
REPORT
ANDEAN

PAGE 54

Ecuador
Watching the gap
PAGE 55

Keeping up
Peru's stock exchange is working to boost liquidity and increase its investor appeal as it faces
the threat of a downgrade to frontier market status. By Lucien Chauvin
Peru's stock market had nearly 300 companies listed at the start of 2016, but it is
betting on just a few to maintain its classification as an emerging market and to start
growing again.
The Lima stock exchange, BVL, received word last August that Morgan
Stanley Capital International (MSCI)
could downgrade the bourse to frontier
status from emerging markets, due to low
liquidity. The BVL got some breathing
room in September, however, when MSCI
said it would put off a decision until June
this year.
The BVL and the Peruvian government
were working on changes before MSCI
made its announcement, BVL CEO Francis
Stenning says, adding that conditions have
already improved and he is confident the
stock market will maintain its EM status.
"It's not like we took a crash course after
the MSCI evaluation," Stenning says. "We
had been working on many of the requirements for some time but we have moved
faster with the implementation."
A change from emerging to frontier market could cost the BVL up to $5 billion as
individual investors and investment funds
move to other markets, Stenning says.
Morocco was the most recent market to
be downgraded to frontier status by MSCI
in 2013. Argentina was moved to frontier
status in 2009. Only Peru is on the list
for reclassification to a frontier market at

52 L ATINFINA NCE.COM - March/April 2016

MSCI's June meeting. Pakistan, in contrast,
could be upgraded to emerging market
status.
The MSCI will base its decision on
market capitalization, floating stock, and
rotation, or the annualized traded value
ratio (ATVR) that measures liquidity.
"When we put the review announcement out (in September), we were really
looking at what has happened in Peru over
the past few years, with declining liquidity
and a marked degradation in aggregate
market cap size of the investible universe
reflected most clearly in our indexes," says
Craig Feldman, MSCI's executive director
of index management research.
He says though this was not MSCI's
intention, the review has "served to some
degree as a wake-up call for Peruvian
authorities to start to look to implement

MSCI's recent reclassifications
Global shuffle
Index

Reclassification

Ukraine

Frontier to Standalone

Qatar

Frontier to Emerging

UAE

Frontier to Emerging

Greece

Developed to Emerging

Morocco

Emerging to Frontier

Trinidad & Tobago

Emerging to Frontier

Israel

Emerging to Developed

Source: MSCI

and expedite more measures to attempt
to reverse the declining trend in liquidity
and obviously the subsequent reduction in
investment opportunities for international
investors."
Home improvement
Stenning says improvements have been
made on all fronts since August to meet
MSCI's requirements, and a growing number of analysts agree.
"I don't see any reason for the reclassification. In objective terms, the Lima stock
exchange complies with the MSCI's criteria
to be listed as an emerging market," Heinrich Lessau, director of research at Credicorp Capital, says.
JPMorgan issued a report in January
on the possible reclassification and said
the BVL had made improvements in the
categories examined by MSCI.
"All in all, we believe the chances
of Peru remaining as [an emerging market] are still significant,"
Date
the bank said.
Sep-15
The Peruvian government
May-14
has also backed up the BVL. It
May-14
eliminated the 5% capital gains
tax for the next three years,
Nov-13
simplified the purchase and sale
Nov-13
of accounts receivable and eased
May-11
conditions for market players to
May-10
move shares.
"The important thing is com-

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