Pakistan strives to hold on to emerging market status

Pakistan walks a fine line between emerging market and frontier. It is clinging on to its hard won status, reports Morgan Davis

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Pakistan returned to the MSCI emerging market index in 2017, after spending almost a decade as a frontier market. But rather than solidify itself as a deserving player in the index, the country has wobbled under domestic pressures. Now, with only three stocks from the country remaining on the MSCI EM standard index, it is teetering on the brink of losing its position once more.

MSCI’s next semi-annual review, scheduled for May, holds the fate of Pakistan in its hands. A country must have at least three stocks in MSCI’s standard index to remain eligible for its rank as an emerging market— that is the exact number that Pakistan currently has. Following the removal of Pakistan’s UBL and Lucky Cement from the index in November, only Habib Bank, MCB and Oil and Gas Development Co remain.

“There may be a chance, we can’t rule it out, that MSCI will take another stock out of our index,” says Nabeel Khursheed, senior financial analyst at Topline Securities in Karachi.

Pakistan’s history as an emerging market is complicated. The country was first named an emerging market in 1994, but it was dropped from the EM index in 2008 during the global financial crisis. Despite the stability it demonstrated in order to return to emerging market status in 2017, Pakistan has spent the last two years struggling to retain its designation.

“Call it bad luck,” says Umer Pervez, director of business development at AKD Securities in Karachi. “The market just trended downwards.”

Pakistan has never fitted neatly into either emerging or frontier market status. “If you look at the GDP, Pakistan is very well situated for emerging markets,” says Hamad Aslam, head of research at Elixir Securities Pakistan. But, he adds, its capital markets are not. The limited size and liquidity of Pakistan’s stock market is better suited to frontier market status, he says 

That dichotomy has been especially apparent in recent years. “For a long time, Pakistan was among the top three frontier markets,” says Aslam. At the time, Pakistan’s economy looked strong, particularly compared to its frontier market peers. “During that period…more importantly, new investors started to look at Pakistan,” he says. “Those were the golden days.”

In contrast, as an emerging market, Pakistan is a small fish in a big pond. “We now have to compete with markets such as China, Russia and India for inflows,” says Aslam. “The millions of dollars…that Pakistan was expecting upon the upgrade never happened, because those funds just ignored Pakistan.”

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Still, many market watchers are optimistic about Pakistan’s future and its ability to hold on to its position as an emerging market. “Things have started to improve,” says Pervez, pointing to last year’s general election.

Imran Khan became prime minister in August 2018, putting his Pakistan Tehreek-e-Insaf party in charge of the country after scandals roiled its previous leadership.

Now, Khan has put transparency and economic reform top of his priorities. Since he took office, China, Saudi Arabia and United Arab Emirates have pledged funds to aid Pakistan, a boon for the country.

“That wasn’t there in these numbers in the last decade or so,” says Saad Hashemy, chief economist at Topline in Karachi. The country appears to be nearing an agreement with the International Monetary Fund (IMF) for additional assistance as well, something people agree will provide clarity for Pakistan’s future.

“Securing an IMF programme would unlock funding from other creditors which are important to Pakistan, like the Asia Development Bank and the World Bank,” says Pervez. “There’s going to be more confidence in terms of fiscal discipline for the economy.” 

Aslam says: “When it comes to foreign investors, they buy the story they understand. They want slightly more certainty on the path with the IMF so that they can make a call.”

Pakistan’s relationship with the US also seems to be thawing, as the US turns to Pakistan to help with its Afghanistan peace talks. The US has the highest voting power on the IMF board, so a warm relationship will be “crucial” for Pakistan, says Pervez.

Improved diplomatic relationships can also materialize in foreign direct investment in the near future, he says. “There’s a new mindset that the [Khan] government wants stability in the region, and is willing to play a proactive role in bringing that stability,” says Pervez. “That will promote more economic activities.”

With so much positive movement in the country, few seem to believe that Pakistan will lose its status as an emerging market. At the very least, it may benefit from how a drop to frontier status so soon after its upgraded to the EM index would be perceived, says Aslam.

Instead, he thinks that it is more likely that MSCI will put Pakistan on a watch list for a year, giving the country more time to rebound.