SL’s frontier market classification likely to be downgraded to stand-alone market status

• MSCI introduces a special treatment to reduce number of potential changes in MSCI Sri Lanka Indexes amid fund repatriation concerns 

Clearing the path for a potential reclassification of Sri Lanka’s frontier market status to stand-alone market status, leading global stock indexes provider Morgan Stanley Capital International (MSCI) has reduced potential changes in the MSCI Sri Lanka Indexes amid the deepening equity investment repatriation issues triggered by the on-going foreign exchange crisis.

“Amidst the ongoing economic crisis in Sri Lanka and as a result of a lack of liquidity in the foreign exchange market, fund repatriation issues in the country’s equity market began to emerge this year. In response to these developments, in May 2022, MSCI introduced a special treatment to reduce the number of potential changes in the MSCI Sri Lanka Indexes,” MSCI announced in its latest Market Classification Review released last week.
As of May 31, this year, the MSCI Sri Lanka Index, which is designed to measure the performance of the large and mid-cap segments of the Sri Lankan equity market, consisting of three constituents—JKH, LOLC Holdings and Expolanka Holdings—had a float adjusted market valuation of US $ 0.52 billion.

MSCI noted that it would continue to monitor the market accessibility of Sri Lanka’s equity market, with feedback from market participants. “MSCI continues to welcome feedback on the level of market accessibility of the Sri Lankan equity market and will consult with market participants to gather feedback if there are any further developments,” it said.

Meanwhile, MSCI announced the launch of a consultation on a proposal for potential reclassification of the MSCI Nigeria Indexes from frontier markets to stand-alone markets status, due to extreme difficulties persisted for foreign investors in repatriating their investments since early 2020.

MSCI has already reclassified the MSCI Russia Indexes from emerging markets to stand-alone markets status in March this year. According to stockbrokers, it took around six months to repatriate equity investments out of Sri Lanka two months ago. Similarly, S&P Dow Jones Indices has also halted the implementation of certain types of events for stocks listed in Sri Lanka, which include Quarterly Share and Investable Weight Factor (IWF) changes, Non-Mandatory Share and Investable Weight Factor (IWF) changes and Rights offerings.

However, First Capital Research (FCR) Head of Research Dimantha Mathew was hopeful of some sort of normalisation of fund repatriation for foreign investors once the country enters into a staff-level agreement with the International Monetary Fund, which is expected to take place soon.

As of last week, net foreign outflow from Sri Lankan equities amounted to Rs.1.25 billion.