Everything you need to know about Pakistan’s likely fall from
emerging to frontier market The glass is not half full, it’s leaking
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By Ariba Shahid and Abdullah Niazi
n the World Trade Center in Manhattan, New York, there are a bunch of fancy men in fancy suits deciding the future of foreign investment in Pakistan. Morgan Stanley Capital International (MSCI) is the world’s leading market index provider, and their decision about the status of the Pakistan Stock Exchange (PSX) as either a developed, emerging, frontier or standalone market will have a lasting impact on foreign investment in Pakistan. The above paragraph is a load of jargon that means nothing to anyone that is not a student of finance or the economy. What is happening, essentially, is that MSCI calculates the worth of different markets around the world and assigns them different rankings. A developed market is the best ranking and a standalone market is the lowest ranking. To calculate these rankings, MSCI provides market indices. A market index is usually a single number that is calculated from different economic factors, like prices or income. These numbers are calculated to be able to compare different economies in different countries. An example for such an index would be the Gross Domestic Product (or GDP). Pakistan currently has Emerging Market status with the MSCI, but it has recently threatened to downgrade Pakistan to a Frontier Market. If the downgradation happens, it will be the second time Pakistan has been downgraded and it will become the only country to be downgraded twice by the MSCI. This means that foreign investors will now look at Pakistan and not be as excited about
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investing there. Essentially, the downgrading would mean Pakistan appears a riskier investment than it would if it remained an emerging market. Profit explain how the MSCI works, makes its calculations, what its history with Pakistan is, and what a downgrading to frontier market might mean for foreign investment in Pakistan.
How it all works
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he last time Pakistan was at a bleak edge like this was in 2008. Back then, Pakistan had the status of an emerging market, which was an ideal place to be in. Pakistan was far away from the dreaded stand alone market status, and had stayed in the emerging category since 1994. The names of these categories are not particularly important, nor do they mean much. All you need to know is that a developed market is the highest rank, followed by emerging markets, frontier markets, and then finally standalone markets at the bottom rung. For countries that fall under the developed category, the ranking is not particularly important. These are large, stable players in the world economy like the United States, Canada, the United Kingdom, Japan, Germany and Australia. The only Middle Eastern country that has this status is Israel, whil Hong Kong is the only Asian country other than Japan to have this status. These are countries where there is no shortage of investors trying to get an in. The real competition is between countries that are either in the emerging markets list or in the frontier market list. These are the countries that are very much trying to look for foreign investors and make themselves attractive opportunities. Naturally, frontier markets
are considered riskier investments so less prolific investors usually end up investing there. Emerging markets status is coveted. Currently that is where Pakistan is at. The question at this point might be how the MSCI determines which country falls under which category. The MSCI has been classifying Emerging and Developed markets since the introduction of the MSCI Emerging Markets Index in 1988. An index, as explained earlier, is calculated from different factors in an economy, like the prices of products or the income of the people operating in the economy.The MSCI uses three such factors which are: 1) economic development, 2) size and liquidity of equity markets, 3) market accessibility for foreign investors. The first indicator the MSCI uses to calculate its index is self-explanatory. It looks at the quality of life of the people operating in the economy and sees whether it is improving or worsening. The second one is a little more complicated. Essentially, liquidity of equity markets means how readily a person can turn their assets into cash. This is an important factor, particularly in Pakistan’s case. Market accessibility is simply about any barriers that foreign investors have in entering an economy - basically how hospitable an economy is to foreign entrants. Using these three factors, the MSCI calculates the market index of a country and through that index it categorizes countries as either developed, emerging, frontier, or stand alone.
Pakistan and the MSCI
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akistan has had a rocky history with the MSCI. For starters, normally when the MSCI gives a country a ranking, that country usually only moves up,
