Peru Avoids Downgrade To Frontier Market Status — For Now

Peru has averted a downgrade from emerging market status to frontier market status by MSCI — at least for the time being.

The South American nation has retained its status as an emerging market by MSCI on Wednesday, thus ending the threat of such a downgrade that could have driven around $5 billion in outflows from the country.

Global equity index provider MSCI, whose indexes are the benchmark for over $9.5 trillion in assets worldwide, will keep Peru’s stock exchange in its group of emerging markets, however warned the bourse that it may be downgraded to the higher-risk frontier status in nine months if liquidity should sink any further, according to a statement from MSCI.

“Failure by the Peruvian authorities and the stock exchange to reverse the declining trend in liquidity … may lead to MSCI’s decision to reclassify the MSCI Peru Index to Frontier Markets in June 2016,” MSCI said in the statement.

The Peruvian bourse has cautioned that a downgrade to frontier status may spur as much as $5 billion of outflows.

MSCI warned earlier in mid-August that Peru could be downgraded to frontier market status as only three securities from the country had met the size and liquidity requirements for emerging market status.

Fearing a downgrade, the Peruvian government promptly introduced a capital gains tax exemption, eased restrictions on market makers and automated trading, and officials from the government and Lima Stock exchange made a trip to New York to explain their plans to boost trading volumes over the next two to three years.

Peru’s benchmark stock index has plunged 32 percent so far this year and is the worst performer among 93 stock markets that are tracked by Bloomberg.

The iShares MSCI All Peru Capped Index Fund, an exchange traded fund (ETF) that tracks Peruvian equities, has tumbled nearly 31 percent so far this year.