What countries are considered frontier markets?
In the past it has not been clear which countries qualify as frontier markets. There has been general agreement over the countries that qualify as developed, but the line between emerging and frontier markets has always been much blurrier. To define what countries are frontier markets, we first considered the two main characteristics of frontier market countries.
Characteristics of Frontier Market Countries
Characteristic #1: Low-income, developing economies
Countries that are low-income and in the beginning stages of economic growth are the types of countries most commonly referred to as frontier markets. This is a great start, but in our experience we have encountered markets which are quite developed, but remain very much on the fringe of the investing space.
Characteristic #2: Obscure, difficult to invest in countries
Frontier markets are countries which are simply not on the radar of most investors. This could be due to the size or geographical location of a country (ie. How many people can point out Latvia, population 2 million, on a map?). It could also be due to strict regulations against foreign investment, or lack of investment infrastructure. All these factors could result in markets that are more illiquid or lack the international institutional ownership seen in their developed market counterparts.
Determining a List of Criteria for Frontier Market Countries
With these two main characteristics in mind, we determined 4 main criteria for deciding whether a country is a frontier market. Two pertain to characteristic #1, and two pertain to #2.
Criteria #1: GDP per capita (on a PPP basis)
GDP per capita is the most obvious choice of deciding between developed, emerging, and frontier market countries. It is a straight forward way for measuring the economic wealth of a country, and we used PPP to make the number easier to compare across countries. The data we used is from IMF’s 2014 numbers, and we had enough data for 200 countries.
We found that a GDP per capita (PPP) over $30,000 generally related to developed countries, and between $10,000 and $30,000 to be emerging market countries. Countries under $10,000 were generally frontier market countries.
Criteria #2: Economic Complexity
While a country’s wealth is an important indicator of how developed an economy is, economic diversity, or how sophisticated a country’s economy is, is also important. For example, some oil-dependent countries have very high GDP per capita (eg. Qatar, Saudi Arabia), but they are largely one-trick ponies without very developed economies.
We decided to use the Economic Complexity Index as a catch-all indicator for how diversified a country’s economy is. Developed by MIT, we used this data when looking at how diversified a country’s exports and imports were in a previous post. It uses a country’s exports data and measures the “industrial composition” of a country’s economy. Countries with more sophisticated, ubiquitous, and diverse exports will have a higher ECI. They have rankings for 144 countries, which can be found here.
We found that an ECI over 0.5 generally corresponded with developed countries, and an ECI between 0 and 0.5 related to emerging market countries. An ECI under zero, or an economy that was not very diversified, generally indicated a frontier market economy.
Criteria #3: Population
One characteristic of frontier markets are that they are obscure, and generally harder to invest in. Countries with small populations fall into both of these camps, as they usually do not have markets large enough to cater to bigger investors.
We saw this with Estonia, a country we have featured recently. With a GDP per capita of almost $27,000 and an ECI of 0.933, they would qualify as developed under our previous two criteria. But with a population of just 1.3 million people, it is simply too small to be on the radar of most investors, no matter its potential.
We found that a population of under 3 million people qualified that country as a frontier market. Only countries on the Dow Jones/S&P list of developed countries were excluded.
Criteria #4: Presence of a Local Stock Market
If frontier market countries are hard to invest in or lack liquidity, then countries without stock markets surely qualify under both criteria. There are 40 countries in the world, 20 of which have a population over 1 million, that lack a local stock market.
We covered these 40 countries in a previous post, and all of these would qualify as frontier markets. Even if they eventually developed a local exchange, it would take a long time to become liquid enough to approach emerging market status.
Determining Frontier Market Countries
Given these four criteria, a country is a frontier market if it fulfills at least one of the first two criteria. However, if a country qualifies under either criteria #3 or #4, it is automatically considered a frontier market, even if it passes the first two criteria.
One of:
- GDP per capita (PPP) under $10,000
- ECI under 0.0
Or qualifies under these two criteria:
- Population under 3 million
- No local stock market
Any countries included on MSCI’s developed or emerging market lists were excluded. Likewise, for consistency we included any country on MSCI’s frontier market list as a frontier market, even if they beat these criteria.
List of Frontier Market Countries
(Last updated Jan 2018)
This is our full list of frontier market countries, a list of 143 countries in total.
- 86 countries qualified under Criteria #1, with a GDP per capita below $10,000
- 71 countries qualified under Criteria #2, with an ECI under 0.0
- 60 countries qualified under Criteria #3, with a population below 3 million
- 39 countries qualified under Criteria #4, with no local stock market
In terms of the number of criteria met:
- 2 countries (aka “Super Frontier” markets) qualified under all 4 criteria, Gambia and Timor-Leste
- 29 countries qualified under 3 criteria
- 59 countries fulfilled 2 of the criteria
- 43 countries qualified under a single criteria
- 10 countries should probably be emerging market economies, but MSCI has kept them as frontier so we have too
