Frontier Market

What is Frontier Market?

Frontier Market is a country that is still developing but has not met the criteria of being called an emerging market and therefore its capital market is less efficient in terms of riskiness, liquidity, security markets rules and regulations.


In 1992, Farida Khambata of IFC Emerging market Database started publishing about underdeveloped and developing markets, this was when this categorization first emerged and in 1999, S&P purchased the rights of the same publication. Later in 2007, it launched two indices focussed on frontier markets by the name of Select Frontier Index and Extended Frontier Index. Eventually, the competitor index publishing companies, such as the MSCI launched their own versions.

Frontier Market


  1. Size of the Country: If a country has a higher development quotient but is still very small to be categorized as an Emerging market country, it is put in the frontier market bracket.
  2. Restricted Markets: Those financial markets which previously had restrictions on the free flow of capital but in the past few years, such restrictions are on a reducing trajectory fall under this category of markets. These restrictions can be in the form of foreign investment limits, rights of foreign investors, information flow and so on, and these determine the level of market accessibility.
  3. Development: The countries with lower development that the countries which are presently categorized as emerging markets form part of this market.
  4. Liquidity: As there are fewer market participants who want to invest their money in such a market, the liquidity for the assets of this market is low.
  5. Risk: As such markets comprise very young companies with lesser years of track record, the risk of investment is very high, and most investments are in the form of joint ventures in which the investor plays a large part in the day to day activities of the companies. Therefore the risk and reward are both very high for investments in such markets.

Broadly on these criteria, MSCI and S&P classify different countries and their financial markets.

How Does it Work?

According to the MSCI June 2014 Market classification framework, based on the above characteristics, the following is the manner in which a country is categorized into the frontier market category:

Frointer Market Category

  • Under the Frontier market and Emerging markets, there is no requirement of sustainable economic development, this point is to demarcate the developing markets from the developed market. According to the World-bank categorization of the high-income threshold, it is based on the per capita gross national income, which should be $12,615 as per the limits published in 2012 using the Atlas method. If a country has a per capita GNI greater than the threshold by 25% for 3 consecutive years, then the country falls under the developed category, otherwise, it is a developing country.
  • The size and liquidity categorization is as follows:
Criteria Frontier Emerging Developed
Number of companies that meet the MSCI index standard At least 2 At least 3 At least 5
Company market capitalization $630 million $1260 million $2519 million
Freely floating securities, ie securities available of investors for the non-promoter group $49 million $630 million $1260 million
Liquidity At least 2.5% Annualized traded volume ratio (ATVR) At least 15% Annualized traded volume ratio (ATVR) At least 20% Annualized traded volume ratio (ATVR)
  • Based on the restriction posed by the market and the accessibility level, the following is the categorization:
Criteria Frontier Emerging Developed
Foreign ownership Little Significant High, if not complete
Ease of capital movement in and out of the economy Partial Significant High, if not complete
Efficiency of operational framework Modest Good High, if not complete
Stability of institutions Modest Modest High, if not complete

Other players such as the S&P also have a similar framework for the categorization of countries into different markets.


All index publishers periodically review and reclassify various economies for upgrades or downgrades from one market to another. As per the results published by the MSCI in June 2019, the MSCI Kuwait index was reclassified from frontier market to emerging market index if it meets the required criteria by November 2019. This was posted the launch of the Market development program in Kuwait, which would lead to the required regulatory upgrades and reduction in market restrictions.

As per the Reuters update, FTSE Russel has concluded on September 26, 2019, that Argentina will continue to be categorized under the frontier market only, because of the imposition of capital controls. This was due to the political and economic instability following the elections in the country, which led to the fall in its currency and bond value. MSCI, on the other hand, had upgraded its classification to an emerging market but is reviewing and monitoring the economy in real-time to publish a review.

There are several countries falling in this market brackets such as Mauritius, Nigeria, Tunisia, Sri Lanka, Vietnam among others.

Difference between Frontier Market and Emerging Market

  1. Economic and Political Stability: Comparing the two markets, emerging markets have greater stability on both fronts as compared to the Frontier market.
  2. Movement of Capital: Emerging markets are more accessible to foreign investment and therefore the movement in and out of the economy is greater.
  3. Risk and Liquidity: Emerging markets are less risky and more liquid.
  4. Breadth of Financial Instruments: A wider variety of financial instruments are available in emerging markets such as derivatives, while the availability of such instruments and an active market for the same is less likely in the case of frontier markets.

Why Invest in Frontier Market?

  • Very high return: Just like a venture capital investment, the expected reward is very high if the project or the company is successful, when it comes to an investment in such markets, as the fund requirement is very high and investor competition is low therefore chances of capturing a greater market share is high. Such an investment is like a double-edged sword, risk and reward are both very high.
  • Growth prospects: As these markets are at a very initial stage, the investors can benefit from an initial period of very high growth.
  • Diversification: As developed markets get saturated, frontier markets provided diversification benefits because it provides exposure to a new economy which has a hopeful and growing trajectory as compared to the cash-cow nature of mature markets.


Frontier market is a term given to a market that is developing but has not reached the level of development required to be categorized as an emerging market due to lack of free flow of capital, liquidity in the market and another measure of economic and political stability.

Such categorization signals to the investor community for whether they can think in the direction of investing in such economies based on the goals and objectives of their investment, therefore, it helps in making an informed investment decision.

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