On Wednesday 11th November, Morgan Stanley Capital International (MSCI) announced that it has launched a consultation for a potential reclassification of Lebanon from Frontier Market status to Standalone Market status.
MSCI stated that the imposition of capital controls in Lebanon, first introduced in October 2019, has resulted in the deterioration of market access for investors and inevitably caused fund repatriation problems, index replicability issues and significant disparities between the parallel and official exchange rates for the Lebanese Pound which is currently trading at 7,925 LBP (vs the US Dollar) on the black market. The recent political and economic developments in Lebanon have also made the timeline for a potential relaxation or removal of the restrictions unclear.
Market participants have expressed their concerns regarding the investability and replicability of the MSCI Lebanon Indexes and related composite indexes, such as the MSCI Frontier Markets Index. Consequently, the launch of the consultation to potentially downgrade Lebanon from the Frontier Markets category may take place in on step coinciding with the February 2021 Quarterly Index Review (QIR).
In June 2020, MSCI applied special treatment for securities classified in Lebanon (as well as Nigeria and Bangladesh). The special treatment meant that there were no changes to the status of Lebanese securities the MSCI Frontier Markets Indexes in August and November as well as Lebanon being retained as a Frontier Market for the time being.
The MSCI Lebanon Index is currently made up by three securities: Solidere A (67.45%), Solidere B (21.83%) and BLOM Bank (10.71%), with all three securities making up a total of 2.11% of the MSCI Frontier Markets Index (1.42%, 0.46% and 0.23% respectively). BLOM Bank was recently added to the MSCI Frontier Markets Index in May 2020. There are no Lebanese securities in the MSCI Frontier 100 Index.
There are four discussion points raised by MSCI in the consultation:
- Given the current level of restrictions imposed by banks, is it appropriate to reclassify Lebanon to Standalone Market status?
- Does the discrepancy between the parallel and official exchange rates for the Lebanese Pound significantly impact the replicability of the MSCI Lebanon Index?
- Would the current restrictions imposed by banks pose a problem in terms of replicating the potential reclassification?
- Do you agree with implementing the reclassification coinciding with the February 2021 Quarterly Index Review (QIR)? Is it warranted to reclassify Lebanon earlier? Alternatively, is it appropriate to implement the reclassification as part of the May 2020 Semi-Annual Index Review?
Feedback from market participants on the reclassification proposal is open until Friday 4th December 2020, with the results to be announced on Thursday 31st December 2020.