Pakistan, for the last couple of years, has managed to remain in the news for all the right reasons. The most recent is the MSCI’s Annual Market Classification Review in which Pakistan came out as the big winner. The global index provider reclassified Pakistan’s status from its frontier market index to the ‘emerging market’ index, a feat which China failed to pull off.
Citing market access issues as a reason, Morgan Stanley postponed the decision to add China’s Class-A mainland shares to the EM index. Though it assured to review the decision in its 2017 cycle, for now the move lends a major blow to China’s ambition of joining the big guns in the international capital market.
The temporary refusal hurts more when viewed in light of Pakistan’s acceptance, a country once known for political turmoil and economic instability, into the EM index. Furthermore, Pakistan’s economy is no match for China which according to IMF is the world’s second largest economy by nominal GDP and the world’s largest economy by purchasing power parity. Hence, despite appearing to be a strong contender in the race, China lost to Pakistan on one very crucial aspect – stability.
In the current capital market, critics view the Chinese market as unpredictable and volatile, a perception that once made Pakistan lose its place in the EM index. Inducted into the EM index in 1994, it was due to the temporary closure of the Karachi Stock Market (for 110 days) in 2008 that led to it being downgraded to Frontier Market status. The decrease in status followed a firm warning that the ‘market needed to function without any trading disruptions for some time before being considered for reclassification in its EM Index.” Hence, from 2008-2016, it took us almost 8 years to climb our way back up to the EM index.
Now back in the EM index, many critics do not deem it as a golden opportunity for the country. Pakistan’s almost non-existent weight of 0.19 per cent (the second-lowest in the index) which places it slightly above 0.18 per cent held by Czech Republic, worries analysts as they feel Pakistan would lose its significance in the presence of bigger, more stable markets. The potential cash inflow is another point to ponder as critics feel it could lose its significance when compared with the cash outflow.
Many, however, are not worried about the cash inflows. According to BMA capital, “the country’s 2008 removal from EM status and subsequent reclassification into the FM status resulted in net outflows of $316 million during the period Aug’08?May’09 – a proxy figure for a potential baseline inflow as a consequence of the upgrade.”
Moreover, many point out that the FM Funds have previously held on to off-index countries like Saudia, UAE, Qatar and Egypt and might make an exception in the case of Pakistan as well.
Moreover, Karachi Stock Exchange has proved to be Asia’s best performing stock market showing a 14 per cent growth this year. Also, the stocks leapt to a record high with the announcement of MSCI’s decision.
Most importantly, despite the uncertainty attached to the validation of the upgrade, there remains one bright aspect to it. The move indicates a significant shift in investor perception about Pakistan’s market credibility and stability – a ground on which China lost.
This is a welcome change of stance for Pakistan as an image overhaul is long overdue. The South Asian country has predominantly been associated with political turmoil and economic instability, despite of its on-ground progress on both fronts. In the last few years, the country’s interest rates are at a 42-year low, inflation has been tamed at about 3 per cent, the currency is stable and foreign exchange reserves have jumped to an all-time high. Moreover, the security situation has shown marked improvement with terrorism related deaths falling down by 74per cent from its 2010 peak.
Yet, despite all the right economic indicators, Pakistan is falling behind in meeting its FDI targets. Although during the first eleven months of FY16, it increased by 10 per cent as compared to the same period in FY15, it still amounted to a total of one billion dollar which, according to economists, is very low and does not meet Pakistan’s requirement.
Apart from the absence of a long term foreign investment policy which deter investors, Pakistan suffers from an image problem that hinders its growth. Similar concerns were shared in a recent Reuters report which states that “convincing foreign investors to overlook the country’s violent past and bet on its economy remains a hard sell.” Pakistan’s reputation precedes its existence and since most investors have never visited Pakistan, the country becomes a hard sell.
Perceptions, however, are gradually changing. In 2015, Pakistan was termed as the ‘next success story’ by Forbes magazine mainly due to its increased security situation. On similar lines, WSJ lauded Karachi’s improving security situation which led to an increase in business activities, significantly in the real estate industry. Citing zameen.com as its source, it pointed out that the ‘combined prices for all types of property in Karachi which rose by 15-20 per cent”.
All these positive commentaries are grabbing investors’ attention, albeit slowly. Though slowly, but investors are making a comeback to the Pakistani market. Prime example is of Engro Corporation, which sold 51 per cent of its share to a Dutch dairy company for an estimated amount of $448 million. On similar lines, a Turkish company was acquired by Dawlance for a sum of $258 million. German company Bosch has entered Lahore while one of its subsidiaries is planning to have a foothold in Pakistan.
Pakistan’s fate is tied with its security situation, especially in its economic hub, Karachi. And so far, Nawaz Sharif’s unlikely decision to work in tandem with the armed forces has led to positive outcomes on almost every front – a fact that needs to be highlighted more. The MSCI upgrade might play a crucial part in reinventing the once tainted image of Pakistan. The effects of it have already started to show with the KSE leaping to a record high performance. Moreover, news are doing rounds of a Pakistani and three foreign investors who want to acquire a stake of up to 40per cent in the Pakistan Stock Exchange (PSX).
Regardless of its meagre weight in the EM index and the cash outflow-inflow debate, the MSCI upgrade will undoubtedly benefit Pakistan in appearing as a more stable market boosting investor confidence – a much needed change of narrative for the country. And if the government manages to sustain its place in the EM index, the move will ultimately be beneficial for the country in the long run.
Sualiha Nazar is a PR and Communication specialist with an interest in global politics. Follow her @sualimoon