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Thu 21 Jun 2012 12:08 PM

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MSCI keeps Qatar, UAE as frontier markets

Gulf states fail to achieve emerging market status after not implementing required measures

MSCI keeps Qatar, UAE as frontier markets
Approximately US$7 trillion in assets are benchmarked against MSCI indexes.

Equity index provider MSCI on Wednesday maintained the UAE and Qatar as frontier markets while keeping South Korea and Taiwan in their emerging market classification, again delaying much-anticipated upgrades.

All four countries remain on review for upgrades in MSCI's next annual reclassification study, the company said in a statement.

A classification promotion for all four countries' equity markets could provide a boost to their stocks by attracting larger pools of investors who track MSCI's benchmark equity indexes.

MSCI also said the Greek equity index faces possible demotion to emerging markets status given it "is no longer in line with developed markets' size requirements with only two index constituents."

Approximately US$7 trillion in assets are benchmarked against MSCI indexes.

For Qatar, MSCI said the "very low foreign ownership limit levels imposed on Qatari companies is expected to be the only remaining impediment to the reclassification of the MSCI Qatar Index to emerging markets."

While the UAE meets all the requirements for promotion, MSCI said there are specific market "accessibility issues" related to custody, clearing and settlement due to a delay in changing the current requirement that international investors still need to operate with a dual account structure.

MSCI had previously denied both Qatar and the UAE promotions in 2009, 2010 and 2011. South Korea has also been under review for four years while Taiwan has been up for promotion for three years, MSCI said in a conference call with reporters.

Limitations on market accessibility and currency convertibility remain unresolved in the case of both South Korea and Taiwan, MSCI said.

Greece's equity index would be forced out of a developed market ranking if its two index constituents were to shrink further in size, MSCI said.

"The Greek equity market has experienced sharp declines, which are of course associated with the situation in Greece, the economic situation. The market has shrunk quite significantly," Dimitris Melas, MSCI's executive director, told reporters.

The index maker said in its statement that Greek authorities have not been receptive to repeated complaints from the international investment community over their prohibition of in-kind transfers and off-exchange transactions. Stock lending and short-selling opportunities are also not well established.

MSCI may also launch a public consultation process that could lead to Greece's index moving toward "Standalone Market" status if restrictions or capital controls were implemented following a potential exit from the European Monetary Union.

"In that case we'd act more rapidly," said Melas, adding: "I want to make a distinction between a potential Greek exit from the euro zone and the more regular review cycle that we have, which is a 12-month cycle."

Greece is embroiled in a sovereign debt and political crisis that for the moment has come off the boil with a new coalition government that seeks to renegotiate a
€130bn (US$165bn) bailout package from the European Union and International Monetary Fund.

Morocco also faces relegation back to frontier market status from emerging market given a significant decrease in liquidity since 2008.

Argentina could potentially face a removal from its frontier market status if the government continues intervening in the markets. In April it nationalised YPF SA, the nation's largest oil company that was controlled by Spain's Repsol .

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