Morgan Stanley Capital International (MSCI), a leading provider of critical decision support tools and services for the global investment community, on Wednesday downgraded Pakistan to a frontier market (FM) from emerging market (EM) status after four years due to low liquidity.
Pakistan had been awarded the emerging market status in 2017 and it was part of the MSCI emerging market index from 1994 until 2008.
“MSCI will reclassify the MSCI Pakistan Indexes from Emerging Markets to Frontier Markets in one step, coinciding with the November 2021 Semi-Annual Index Review (SAIR). Based on a simulation using pro forma data as of August 31, 2021, this would lead to the inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.90%,” read the press release.
“The Pakistani equity market meets the requirements for market accessibility under the classification framework for emerging markets, however, it no longer meets the standards for size and liquidity,” MSCI said in a statement.
Pakistan will become part of the MSCI FM 100 Index from May 2022, the statement said. The decision has been taken due Pakistan’s continuous fall below the MSCI’s criteria in terms of size and liquidity after 2017.
“Overseas investors sold shares worth more than $1 billion since the upgrade to an emerging market in 2017 as the benchmark KSE-100 index was down to 12 per cent from its record high,” according to a fund manager.
Pakistan has a share of of 0.02 per cent in the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
“Only three stocks – Lucky Cement Limited, MCB Bank Limutes and Habib Bank Limited are included in the MSCI Pakistan Index, but none of them has met the size or liquidity criteria since November 2019,” MSCI said.
The MSCI EM Index has three constituents from Pakistan, whereas MSCI FM Index is simulated to have four constituents – with OGDC being the additional constituent, the MSCI statement stated.
Market experts see the move beneficial for Pakistan as it will enhance the country’s presence on the MSCI frontier markets index.
However, they feared that foreign investors could withdraw around $150 million of their investment from the KSE-100 index.
“Based on Pakistan’s weight of 0.02 per cent and estimated global passive emerging market assets under management of $400-500 billion, we estimate investments of passive EM funds in Pakistan to the tune of $125-175 million, where around $75-100 million are likely invested in main EM stocks while $50-75 million are potentially parked in small-cap EM stocks,” UAE-based media quoted the statement as saying.
Former finance minister Ishaq Dar has termed the development as “extremely sad news”.
Extremely sad news as Pakistan being downgraded as “Frontier Market” in MSCI Index. PMLN worked very hard to take Country in “Emerging Markets, that included merger of 3 Stock Exchanges into Pakistan Stock Exchange & introduction of corporate reforms including Companies Law 2017 pic.twitter.com/2nWQwtzJHS
— Ishaq Dar (@MIshaqDar50) September 8, 2021
He said, “PMLN worked very hard to take Country in Emerging Markets, that included merger of 3 Stock Exchanges into Pakistan Stock Exchange & introduction of corporate reforms including Companies Law 2017”.