In an announcement on Thursday 17th December 2020, Morgan Stanley Capital International (MSCI) confirmed that Lebanon will be reclassified from Frontier Market to Standalone Market Status in February 2021.
Following feedback from markets participants who responded to MSCI’s recent consultation on whether or not Lebanon should remain as a Frontier Market, MSCI have concluded that the demotion to Standalone Market Status will take place in one step, coinciding with the February 2021 Quarterly Index Review.
The introduction of capital controls in October 2019 have resulted in the deterioration of market access for investors and has led to repatriation problems, index replicability issues and significant disparities between the parallel and official exchange rates for the Lebanese Pound (LBP), which is trading at 7,850 LBP against the US Dollar as of 23rd December 2020. Lebanon was initially warned by MSCI in June 2020, along with Nigeria and Bangladesh, on potential issues that could arise from the continued deterioration of its equity and FX markets due to capital controls. Consequently, this has led to the country failing the “Ease of capital inflows/outflows” criteria listed under the “Market Accessibility Criteria” for it to remain as a Frontier Market, with the minimum requirement being “at least partial”.
After BLOM Bank GDR was removed from the MSCI Frontier Markets Index (including the MSCI Lebanon Index) towards the end of November 2020 when it delisted its GDSs from both London and Luxembourg’s International Order Books (despite the bank being added to the MSCI Frontier Markets Index in May 2020), the MSCI Lebanon Index currently comprises of two shares: Solidere A (75.46%) and Solidere B (24.54%). Lebanon’s weight in the Frontier Markets Index is currently around 1.5%. There are no Lebanese stocks in the MSCI Frontier Markets 100 Index.
Since the start of the year, Lebanon’s BLOM Index has declined by just under 21% and has underperformed versus the MSCI Frontier Markets Index (which has declined by nearly 4% YTD). Unlike most markets across the world, including many Emerging and Frontier Economies, Lebanon’s stock market has failed to bounce back from the low points between March and May this year due to the economic, political and social crises the country is facing.
In order to facilitate index replicability at the time of the reclassification, MSCI has stated that it will reflect the foreign exchange gap by deleting each Lebanese security from the MSCI Frontier Markets Indexes at a value 80% below its last traded price as of the close of February 26th 2021. This will be done in order to dampen any issues caused by the current restrictions imposed by banks on the currency.
Lebanon’s downgrade means that only three countries will represent the Middle East in the MSCI Frontier Markets Index: Bahrain, Jordan and Oman. At this present time, only Palestine represents the Middle East as a Standalone Market Index.