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The Curious Case of The Bahamas Index Exclusion
The line between emerging and developed markets can often be blurred. While we advocate for a broad investment approach that encompasses a wide range of opportunities, index providers often draw a clearer distinction. This stricter approach can result in the exclusion of certain countries from the investable universe. One example is The Bahamas.
The primary reason J.P. Morgan does not include The Bahamas in its emerging market debt indices is because it considers it too wealthy based on GNI per capita to classify as emerging, despite the country having key emerging market characteristics, especially regarding financial market development. According to J.P. Morgan’s index methodology, an emerging country must have a GNI per capita below approximately $22,000 for three consecutive years. The Bahamas’ GNI per capita is around $30,000, which exceeds this cap. However, the story doesn’t end there.
Several countries included in the index have GNI per capita figures well above the stated limit and are significantly wealthier than The Bahamas. For instance, Qatar's GNI per capita is approximately $70,000, UAE's is about $50,000, and Bahrain and Saudi Arabia come in around $30,000 each. Nonetheless, these nations collectively account for over 15% of the index. Why are exceptions made for these wealthy countries but not for The Bahamas?
The GCC Loophole
In January 2019, J.P. Morgan updated its methodology to factor in a country’s cost of living relative to the US. As a result of this adjustment, the GCC countries - Qatar, UAE, Bahrain, Kuwait and Saudi Arabia – became eligible for inclusion. Coincidentally, other examples of EM countries, such as The Bahamas, still do not meet inclusion criteria. We find it difficult to understand why these wealthy countries were specifically targeted for inclusion, but other countries, like The Bahamas, remain excluded.
Index Inclusion Justice for The Bahamas!
We believe The Bahamas deserves a place in the major emerging markets indices and think index providers should consider the IMF’s approach to small states as a model. Small but well-to-do states like The Bahamas (population 400,000) often face development challenges that more resemble emerging rather than developed countries due to their size, especially when contending with climate-related challenges and recurrent natural disasters. Because of this, the IMF has significantly eased access to its Resilience and Sustainability Facility (RSF)—a longer-term climate-focused financing facility—for smaller but wealthier states, like The Bahamas.
Essentially, the IMF made an exception to its own development financing criteria because it realized some countries that are wealthy on paper are fundamentally emerging in practice, and it is unfair to punish them for having a few good macro statistics. Index providers should address this flaw in their indices and allow small states, like The Bahamas, to be included in their emerging market debt indices, just as they have for the GCC!
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