Peru Economy May be Downgraded to Frontier Market

Over the past few years, Peru has been marked as an emerging market. However, it seems that the Latin American country may not stay that way, as the Morgan Stanley Capital International is looking into downgrading their economic status.

According to The Street, Morgan Stanley, the company that manages economic benchmarks, has been looking into Peru's market condition since August 2015. Unless their liquidity levels rise, Peru may be downgraded to a frontier market. This kind of movie will have a negative impact on the Peruvian market, as index funds are likely going to divest. However, until the country's status expires in June 2016, there is still hope.

So what is the difference between an emerging market and a frontier market, and why are these labels very important to Peru's economy?

According to Investopedia, emerging markets are considered "less economically developed countries," which means that, although they have a more mature market, they still do not have the strong economy of the United States or Japan. Forbes noted that emerging markets like Brazil and China, for instance, are labeled as "emerging" due to their recent fast economic growth, and potential to compete with the larger G-6 economies that include the US, Japan, UK, Germany, France, and Italy.

Frontier markets, on the other hand, are said to be even less economically developed than emerging markets. Many of them don't even have their own stock exchange. Some frontier market countries include Croatia, Tunisia, and Pakistan. These countries are very risky to invest in, as noted by the little number of investors and investment holdings that they have. Investopedia noted that most frontier markets mostly have stocks of financial, telecommunications, and consumer companies that rely on the monthly payments from their customers. More than that, they run a high currency risk, which means that they will not work well with small investors.

Forbes has a better way of identifying frontier markets --- that is, whether or not it has a Starbucks. The aggressive marketing campaign of the company ensures that they will only put up stores in robust economies, so as Forbes put it, "if it doesn't have a Starbucks, it's a frontier market."

In the case of Peru, getting downgraded into a frontier market will mean that the country is less economically developed if put in a global marketplace setting. While this can provide a good level of investment, it also carries a lot of risks that many large investors may not be willing to explore.

However, at this point, Peru has enough stocks and market liquidity that could possibly help it hold on to its spot as an emerging market. However, this has to keep up until June for them to renew their emerging market status, otherwise, a downgrade is inevitable.