Pakistan has been downgraded to Frontier Markets Index, a little over four years after it was reclassified as an emerging market.

In a press release, Morgan Stanley Capital International said that decision was taken in the light of feedback provided by the market participants. MSCI said that the reclassification to Frontier Markets will coincide with the November 2021 Semi-Annual Index Review (SAIR).

MSCI said that the Pakistani equity market is unable to meet the standards for size and liquidity despite adequate market accessibility under the classification framework for Emerging Markets.

“Since the November 2019 SAIR, there have been no securities in the MSCI Pakistan equity universe that meet the Emerging Markets size and liquidity criteria within the MSCI Market Classification Framework.”, the press release added.

Pakistan was promoted to the status of an emerging market in June 2017 due to its economic reforms and market access. Even at the time, some were sceptical of the promotion saying that the Emerging Market Index was a “pond too big for a small fish like Pakistan” with its near $300-billion economy. On the domestic level, the market hailed the move considering it an opportunity to promote the PSX and the politicians took the credit for the development.

Since the promotion; however, a steady decline in market capitalisation of the companies listed on the MSCI Pakistan EM Index has led the country where it realistically belongs: the FM Index.

Experts say that Pakistan would invite more interest in the FM Index. Tundra Fonder’s founding partner and Chief Investment Officer Mattias Martinsson said, “There would be foreign outflow in 13 to 14 stocks, but we believe local funds have the power to absorb the selling. It will be quickly passed.”

Head of research at Arif Habib Limited Tahir Abbas expects Pakistan to remain in the limelight of foreign investors. Abbas said, “Barring Vietnam, the fundamentals of the KSE-100 Index are relatively stronger than those of the peer markets with a higher weight with valuations at very enticing levels.”

Pakistan posted a GDP growth of nearly 4% in the fiscal year 2020-21, beating the predictions made by its own central bank State Bank of Pakistan and the International Monetary Fund. What followed was an economic contraction; the first in over seven decades. The economy is not out of the woods yet since the country is targeting 5% growth this year with a large trade deficit in the first two months of the ongoing fiscal year.


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