ISLAMABAD – According to Bloomberg, Pakistan’s inclusion in the MSCI Inc.’semerging-market indexes has come under a threat as Pakistan’s stocks fallbelow the market-size threshold.
The report stated that Pakistan was promoted from a frontier nation in June2017, but it has erased about $44 billion of equity value since then whichhas narrowed its weight in the MSCI Emerging Markets Index to just above 3basis points, lower than the 8 basis points Morocco and Jordan had whenthey were downgraded, according to EFG-Hermes Holding.
Furthermore, Habib Bank Ltd., one of the three stocks in the MSCI’sPakistan gauge, now has a market capitalization of under $1.6 billion.
The MSCI usually requires at least three stocks to remain above that levelfor a country to maintain the emerging-market status. At the moment, noneof the three stocks fulfill the free-float requirement.
There is a “50 percent probability Pakistan will be put on review in June”for a downgrade, Mohamad Al Hajj, an equities strategist at EFG-Hermes,said by phone. “If it happens, it will be the fastest upgrade anddowngrade.”
Bloomberg further stated that this does not mean a demotion is imminent.MSCI, whose indexes are tracked by global investors to make investmentdecisions, doesn’t react to every change in market value or take decisionsbased on a single characteristic.
“MSCI may decide to keep the market for some time within the same status,while keeping three constituents using the index continuity rule,” theindex provider said in an emailed response to questions. “Secondly, thefinal decision to reclassify could be made following a public consultation.”
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Pakistan gained back its emerging-market status after convincing globalinvestors of its economic reforms and market access. Even though investorsincluding Mark Mobius expressed concerns regarding Pakistan’s promotion inthe emerging market, the country’s policymakers expected it to help attractglobal capital and deepen funding access for local businesses.
Pakistan failed to attract the expected investment flows. The upgrade wasfollowed by the Karachi market witnessing the worst foreign selling sincethe 2008 financial crisis and currency depreciation that pushed itsbenchmark index to the world’s second-worst performer.
The nation had been added to MSCI Emerging Markets Index with six companiesbut three were removed after falling below the market-value threshold.
“When an index contains less than three securities, then the next largestsecurities by free float-adjusted market capitalization may be added to theStandard Index,” MSCI said.
Some investors point out that Peru and Egypt had been in a similarsituation in the past and MSCI didn’t downgrade them.
