US-headquartered index compiler MSCI could potentially downgrade Egypt in future, it said when it announced the results of its semi-yearly classification review on 12 June.

“MSCI may be forced to launch a public consultation with the investment community on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation on the Egyptian foreign exchange market to worsen and result in the inability of international investors to repatriate their funds,” it said in its classification review report.

“In addition, this situation may also have a negative impact on the liquidity of the Egyptian equity market, which could trigger a review of the MSCI Egypt Index for potential reclassification to Frontier Market due to the lack of liquid investable stocks.”

Egypt’s depreciating exchange rate, together with increasing central bank financing of the government, is likely to lift inflation in Egypt above already relatively high levels, US-based Standard & Poor’s Ratings Services (S&P) said in May.

Since the uprising of 2011, economic growth in Egypt has been weak and the Central Bank of Egypt (CBE) has seen a sharp drop in its foreign exchange reserves. Domestic banks continue to be the main investor in government securities, but Cairo is increasingly resorting to greater financing from the CBE.

MSCI downgraded Morocco to a frontier market in November last year. The economy is facing several challenges, the government needs to cut spending by MD15bn ($1.7bn) this year to reduce its MD22.9bn budget deficit, and stock market has been struggling with liquidity for several years.

“This downward trend in liquidity has shown no sign of reversal,” said MSCI.

The downgrade may not have a particularly negative effect on investments, as some investors are showing interest in gaining more exposure to frontier markets. According to a report by US-headquartered financial services corporation Citigroup published last month, frontier markets equities have risen 15 percent since the start of 2013, while emerging markets have dropped 5 per cent.

“We believe the [Moroccan] market is looking increasingly attractive having underperformed in recent years. The point at which many others are selling is often a good time to buy,” said Sam Vecht, US-based BlackRock’s head of the emerging markets specialist team and portfolio manager of the Frontiers Investment Trust.

“We continue to believe that Frontier Markets with their strong GDP growth, positive demographic profile, low debt burden and relatively low correlation to developed markets are a great place to invest for those who have both a long-term horizon and wish to see capital and income growth.”

Morocco and Egypt may be struggling, but the GCC stock markets are showing signs of improvement. The UAE and Qatar will both be upgraded to emerging markets status in May 2014.