MSCI Downgrades Pakistan to Frontier Market Status

MSCI downgraded Pakistan’s status to a frontier market from an emerging market after asserting that the country’s securities no longer met classification requirements.

“Although the Pakistani equity market meets the requirements for Market Accessibility under the classification framework for Emerging Markets, it no longer meets the standards for Size and Liquidity,” MSCI said in a press release.

In June, the index provider announced that it would seek consultation regarding a reclassification, which would correspond with its semi-annual index review (SAIR). It then made a decision using the feedback provided by market participants during that consultation.

“Starting with the November 2021 SAIR, the MSCI Pakistan Indexes will be rebalanced using Size and Liquidity requirements for Smaller, Average Liquidity Frontier Markets as described in section 5.2 of the MSCI Global Investable Market Indexes Methodology,” the MSCI said.

The statement added, “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 percent.”

In a report, KASB Bank said that it estimates Pakistan’s weight at 1.94 percent in the MSCI Frontier Markets Index.

It also projects outflows of about $100 million from the three existing constituents when the downgrade takes effect on December 1, 2021.

However, KASB still expects positive net foreign flows over the long run. It said that Pakistan’s reclassification to frontier market status in May 2009 attracted $735 million of foreign inflows in 18 months.

The downgrade was long-expected by analysts, as the market capitalization of companies listed in the index kept falling after MSCI reclassified the country as an emerging market in 2017.

In 2017, prompted by positive investor sentiment and market reforms, the index provider upgraded Pakistan’s indexes. However, many were skeptical about how long the country would manage to hold onto the status.

Still, despite Pakistan’s short-lived stay in the frontier markets category, the upgrade succeeded in promoting the country’s stock market and in attracting investment.

Likewise, many analysts believe that the downgrade won’t cause significant harm to the country’s appeal to foreign investors.

Mattias Martinsson, the founding partner at Sweden-based fund Tundra Fonder, told Business Recorder, “We believe Pakistan would garner more interest in the FM (Index).”

Similarly, the Head of Research at Arif Habib Ltd., Tahir Abbas, said that he didn’t expect the reclassification to deter foreign investment and was confident that recent structural market reforms would yield encouraging results in the near future.