FTSE Russell keeps Pakistan on watch list amid index weight decline

KARACHI: Global index provider FTSE Russell has kept Pakistan on the watch list for potential demotion from secondary emerging to frontier market status amid a decline in its index weight over the past few years.

The global index provider, tracking $15.9 trillion in assets, has opted not to downgrade Pakistan from its secondary emerging market status in its first 2024 review. "Consequently, following the recommendations received from the FTSE Equity Country Classification Advisory Committee and the FTSE Russell Policy Advisory Board, the FTSE Russell Index Governance Board has determined to retain Pakistan on the watch list as part of the March 2024 Interim Update," the index provider said in a statement.

Bloomberg reported that the FTSE Russell decision comes after a period of positive developments, including political stability in Pakistan with a reform-friendly prime minister. "These measures have alleviated default risks and led to (Pakistan) equities outperforming emerging market (EM) peers. Despite facing economic challenges, this move by FTSE Russell offers a potential lifeline to Pakistan, which has seen a significant reduction in foreign portfolio flows over the past seven years."

The decision not to downgrade has significant implications for passive stock funds, which may now resume investing in Pakistan. Pakistan's market capitalization had plummeted from $100 billion in 2017 to $21 billion last year, partly due to its small weight in the MSCI Inc. emerging market index and political instability.

The index provider said in its latest country classification review for equities and fixed income that over the last few years, Pakistan has experienced a steady decrease in its index weight within FTSE Russell global benchmarks. "This has resulted in the market failing to meet the minimum investable market capitalization exit level threshold required to retain a Secondary Emerging market status."

FTSE said if Pakistan failed the minimum investable market capitalization and securities count exit level thresholds, based on data as of the close on Friday, June 28, 2024, then subject to final ratification by the FTSE Russell Index Governance Board, Pakistan would be demoted from Secondary Emerging to Frontier market status. This action will be taken in conjunction with the September 2024 index reviews that are effective from the open on Monday, September 23, 2024. FTSE Russell will provide an update on the Watch List status of Pakistan at the beginning of July 2024.

The minimum investable market capitalization and securities count assessment is conducted twice a year, based on data as of month-end June and December. Based on data as of the close on Friday, December 28, 2023, Pakistan marginally passed the minimum investable market capitalization exit level threshold that is required to retain secondary emerging market status.

Pakistan will next be assessed against the minimum investable market capitalization and securities count exit level thresholds based on data as of the close on Friday, June 28, 2024. FTSE Russell will announce the results of the assessment by Friday, July 05, 2024.