In its Market Classification Review for 2020, index compiler Morgan Stanley Capital International (MSCI) announced that Turkey could be stripped of its Emerging Market status due to market accessibility concerns.
MSCI will launch a consultation on the potential demotion of Turkey from the Emerging Markets category to either the Frontier Markets or Standalone category “if the already deteriorating accessibility level of the Turkish equity market were to worsen further”. Liquidity in the market has substantially worsened over the last few months due to the imposition of short selling and stock lending bans in October 2019 and February 2020 respectively, severely restricting the ability of institutional investors to “express active investment views and hedge portfolio risk”.
Turkey has been classified as an Emerging Market since 1989. Historically, Turkey’s weighting in the MSCI Emerging Markets has been decreasing over time and now stands at roughly 0.43%, despite reaching a high of just over 5.5% in April 2000. The last time it comprised of over 1% of the Index was towards the end of 2017 (the below tweets are courtesy of Charlie Robertson of Renaissance Capital and Emre Akcakmak of East Capital).
Removal from the Emerging Markets category will prompt further outflows from Turkish markets. Markets this year have already seen foreign investors sell $3.93 billion in equities this year, according to Bloomberg. The Turkish Lira has also weakened by just over 15% against the US dollar since the start of the year, while the MSCI Turkey Index has declined by 5% over the same period. Ratings agencies Fitch, S&P and Moody’s have all reaffirmed a negative outlook for Turkish companies, including those in the financial and banking sectors.
MSCI’s announcement could potentially give Turkey’s policymakers a push to review the current restrictions that are in place and move towards something that encourages inflows and free movement of capital. The Turkish government announced a series measures to protect the Lira since its monetary crisis in 2018, which in turn has driven international investors away from the market. The International Monetary Fund (IMF) has also confirmed its forecast of a 5% contraction in Turkey’s GDP for 2020 before recovering 5% in 2021.
Turkey isn’t the only Emerging Market with its classification under threat. MSCI has also launched a consultation on whether or not Argentina should be reclassified as a Frontier Market or an Unclassified Market. Like Turkey, Argentina’s place is in jeopardy due to the capital controls that are in place, forcing rival index compiler FTSE Russell to remove Argentinian securities from its FTSE Frontier Markets Indexes earlier this year.