MSCI Elevates Romania to Advanced Frontier, But EM Path Widens
Stricter Criteria Increase Hurdle for Emerging Market Status
Romania has been recognized with a new “Advanced Frontier Markets” classification by MSCI, a move that boosts its global profile but simultaneously raises the bar for achieving coveted Emerging Market status. This reclassification, effective earlier this summer, separates Romania into a distinct group of five markets with relatively strong accessibility and institutional infrastructure.
New Market Tiers Create Opportunities and Challenges
The newly formed Advanced Frontier Markets category places Romania alongside Slovenia, Estonia, Latvia, and Lithuania. This segmentation distinguishes these nations from the broader group of 23 frontier markets. While this enhanced visibility could attract international investor attention, the underlying criteria for upgrading to Emerging Market status have become significantly more demanding.
The updated MSCI framework mandates that countries aiming for EM classification must now feature at least three companies that consistently meet stringent quantitative benchmarks. These include a market capitalization of at least USD 2.964 billion, a free float of at least USD 1.482 billion, and an annual traded value ratio (ATVR) of 15% or higher. Crucially, these metrics must be sustained over eight consecutive semi-annual reviews, imposing a minimum two-year waiting period.
Romanian Companies Face Stricter Qualification Hurdles
As of mid-year, only one Romanian company, Hidroelectrica, meets all three MSCI criteria. OMV Petrom, Banca Transilvania, and Romgaz currently satisfy two out of the three requirements, with meaningful, though surmountable, gaps primarily in liquidity. For instance, Banca Transilvania would need an 11% increase in turnover, and OMV Petrom a 20% boost, to reach the ATVR threshold. Continued market momentum could facilitate these adjustments.
However, for other major Romanian issuers, the task is considerably more challenging. Romgaz requires a substantial 79% turnover increase. BRD Groupe Société Générale faces a dual challenge, needing a 19% rise in free float and an 89% increase in turnover. Nuclearelectrica (SNN) presents the steepest climb, needing a 139% free float expansion and a 241% turnover surge. Such increases in free float often necessitate strategic decisions from majority shareholders, such as the Romanian state, to reduce their holdings and facilitate broader public ownership. Without these structural changes, many of Romania’s largest listed firms may remain outside MSCI’s eligibility window.
Slovenia, also reclassified as Advanced Frontier, currently lags behind Romania. Its top firm, Krka, meets two criteria but requires a 196% turnover increase. NLB Bank meets only one criterion, though its more modest gaps could be achievable. Slovenia has yet to demonstrate the required three qualifying issuers.
Economic Fundamentals Bolster Investor Confidence Amidst Reforms
Despite these structural hurdles, Romania benefits from robust underlying economic fundamentals, attracting significant investor interest. As one of the European Union’s fastest-growing economies, recent political clarity and fiscal consolidation efforts have fostered a more optimistic sentiment. This shift was reflected in Romanian euro-denominated bond spreads tightening post-election and a 5.4% surge in the BET index the day following the vote. Trading liquidity on the Bucharest Stock Exchange has also improved, driven by political stability and the return of international capital.
This positive momentum could help Romania bridge the gap to Emerging Market inclusion, especially if corporate performance is bolstered by rising turnover and stable share prices. However, sustained advancement hinges on more than just market forces; strategic privatizations, enhanced free floats, and policies promoting higher trading activity are vital for unlocking the country’s full potential within MSCI’s framework.
The practical benefits of the Advanced Frontier label are currently limited, as no ETFs specifically track this category. In contrast, ETFs linked to MSCI Emerging Markets manage over USD 70 billion in assets, with USD 1.6 billion in net inflows last quarter. Romania’s eligibility for such large-scale passive capital allocation remains contingent on crossing the EM threshold.
In summary, Romania’s new classification signifies differentiation within the frontier space but does not guarantee an expedited route to Emerging Market status. The accompanying stricter rules and higher thresholds necessitate sustained effort from companies, investors, and policymakers. While Romania is positioned as a promising regional market, meeting MSCI’s enhanced standards will require strategic initiatives, extending the timeline for potential upgrade to a minimum of two years after all criteria are fulfilled.
