Argentina, South America's third-largest economy, could see
its tenuous grasp on frontier markets status loosen more rapidly
after Standard & Poor's pared the country's credit rating one
notch to B- from B on Tuesday.
Following its annual classification review in June, index
provider MSCI (NYSE:
) said Argentina was on review for possible downgrade. In
FTSE Group echoed those sentiments
"Argentina is listed for possible demotion from Frontier due
to continuing stringent capital controls imposed on international
investors and the perceived lack of an independent regulatory
authority to protect the rights of shareholders," FTSE said in a
statement. "Argentina was demoted from Secondary Emerging to
Frontier in 2010."
News of the S&P downgrade followed a ruling last week by a
U.S. appeals court, which ruled the country cannot pay down its
sovereign debt while refusing to pay holders of previously
defaulted debt. The ruling sent credit default swaps on Argentine
debt soaring as much as 576 basis points, or 5.76 percentage
points, to 1,534 basis points,
according to Bloomberg
With U.S. equity markets closed Monday and Tuesday because of
Hurricane Sandy, the impact of the court ruling on the Global X
FTSE Argentina 20 ETF (NYSE:
), the lone Argentina-specific ETF, is not yet known. Combine the
court ruling with the S&P downgrade and it is reasonable to
expect ARGT could be in for downside.
Due to the Argentine government's
anti-free market practices
, ARGT is off almost 19 percent year-to-date.
Where Argentina Goes From Here
As Bloomberg noted, a credit rating of B puts Argentina on the
same level as Belarus, Jamaica and Pakistan. It might be more
instructive to look at the credit ratings of the countries that
comprise the newly minted iShares MSCI Frontier 100 Index Fund
With a weight of 3.2 percent, Argentina is the eighth-largest
country weight in the iShares MSCI Frontier 100 Index Fund.
Comparably rated Pakistan is FM's sixth-largest country
component. Kazakhstan and Oman, the two countries right in front
of Argentina in FM, are rated BBB+ and A, respectively, by
S&P. Bangladesh and Vietnam, the countries directly behind
Argentina in FM's lineup, are each rated BB-.
Kuwait and Qatar, which combine for almost 46 of FM's weight,
are rated AA. Nigeria, another top country weight in FM, is rated
B+. In other words, Argentina sitting at B- looks bad even by the
standards of frontier markets.
Making matters worse is the fact that Fitch Ratings pared its
rating on Argentina's long- and short-term foreign currency debt
to B and placed the country on credit-watch negative. Of the
top-10 country weights in FM that Fitch rates, almost all rated
higher than B.
Argentina's economic and political woes have the potential impact
ETFs beyond ARGT and FM. The $154.6 million Guggenheim Frontier
Markets ETF (NYSE:
) features an 8.54 percent allocation to the country, making it
the ETF's fifth-largest nation weight.
FRN's saving grace could prove to be the other South American
nations represented in the fund. Decidedly more dependable and
home to superior growth rates and
and friendlier governments
, Chile, Colombia and Peru combine for over 63 percent of FRN's
For more on Latin America and ETFs, click
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