UPDATE 1-JP Morgan reviews removal of Argentina from some indices

4 min read
Americas, EMEA
Miluska Berrospi

Argentina was placed on watch Tuesday for possible removal from several local currency indices produced by JP Morgan due to the imposition of capital controls this month.

The move is expected to put index followers in an awkward spot and in some case may force them to sell at a loss.

"It will not make any difference to us," said Jan Dehn, head of research at EM investment manager Ashmore.

"But it forces passive investors into liquidation at a terrible time, ie near lows which they lock in without hope of making their money back."

The US bank said in a report on Tuesday that the country was under review for potential exclusion from its Government Bond Index-Emerging Markets (GBI-EM) Global and Narrow index series

The Local Market Index (ELMI+) is also on watch ahead of its quarterly rebalancing on September 30.

"Countries with explicit capital controls are not eligible for the GBI-EM Global and Narrow series, as per the index rules and methodology," the bank said.

Argentina accounts for about 0.17% of the GBI-EM Global Diversified index. If excluded, it will not be eligible for re-inclusion for a minimum of 12 months.

Three of its Bote bonds are included in the index: its October 3 2021, October 17 2023 and October 17 2026, which have been yielding 96.02%, 57.69% and 46.35%, according to JP Morgan.

Together, principal value on the notes is around Ps223bn, or about US$3.8bn, as of the end of August, but market value is closer to US$1.6bn, the bank said.


The move surprised few in the market, as the criteria on those particular indices calls for the removal of bonds issued by a country that imposes capital controls.

"This was a foregone conclusion after they reintroduced capital controls and made it very difficult for non-residents to convert peso holding maturities and coupon payments into dollars over very strict limits," said Patrick Esteruelas, head of research at Emso Asset Management.

The government imposed capital controls at the beginning of September following a sharp decline in its currency, which hit 60 against the dollar at one point.

The government has also called for a debt reprofiling of billions of dollars in local and international law bonds as well as debt extended by the International Monetary Fund.

Argentineans are now restricted to purchasing US$10,000 a month and companies have to request permission to distribute dividends abroad or buy dollars in the foreign exchange market.

Exclusion from the index will impact passive investors, forcing them to liquidate their positions. It will also be an issue for investors restricted from replicating the index.

The situation is a Catch-22 for investors who will need to sell the debt but are limited by capital controls.

"Unfortunately, a lot of investors are stuck there," said a New York syndicate banker.

"It’s tough for investors who are in the index but now can’t get out because of capital controls."

JP Morgan said it would remove the bonds from the index by November 29 if there were no changes made to the capital controls.

Approximately US$226bn in assets are benchmarked to the GBI-EM suite of indices as of August, said the bank.

The last country to be removed from the index was Thailand also due to the implementation of capital controls in March 2007.

Argentina remains included in the broadest GBI-EM index series, which allows the inclusion of countries with capital controls, as long as they satisfy other criteria, the bank said.

The bank also said that it there were no changes to the country's eligibility on hard currency indices such as the EMBI and CEMBI.