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Pakistan escapes downgrade to frontier markets on cap relief


May 15, 2019

KARACHI: Pakistan saved its skin from a potential downgrade to frontier from emerging markets despite odds in the much-awaited semi-annual index review for the Morgan Stanley Capital International (MSCI) equity indexes on Tuesday.

All three constituents of Pakistan – HBL, OGDC and MCB – managed to secure the status of the standard index, despite falling short of meeting the size requirement of the emerging markets (EM) index outlined by the MSCI.

“Buffer rule most likely saved the day for Pakistan whose weight in MSCI EM Index is now estimated at 0.03 percent, down 7 to 8 basis points since its inclusion in June 2017,” brokerage Topline Research said in a flash note.

MSCI’s buffer rule allows 66 percent of free float and full market capitalisation – $494 million and $988 million, respectively – to maintain status in the EM index. Habib Bank Limited (HBL), Oil and Gas Development Company (OGDC) and MCB couldn’t meet MSCI’s standard free-float market capitalisation criteria of $741 million last month, while the latter two managed to meet full market capitalisation criteria of $1.482 billion.

MSCI reclassified the country to emerging market index in June 2017 after keeping it on frontier markets for nine years and that was expected to attract $300 to 500 million foreign inflows from the funds tracking the index.

It was expected that the country might be excluded from the MSCI EM index if its blue-chips continue to derogate from the required free-float standards.

“The (exclusion) was unlikely given some cushion available to existing constituents as well as the process of public consultation before announcing to downgrade a country,” Topline Research added.

The MSCI, however, deleted small cap Fauji Cement, Fauji Fertilizer Bin Qasim and International Steels from the country’s investable market index, leaving it representation with a total of 22 stocks.

Stocks market emerged as the worst performing investment avenue among all its peers during 2018 as economic and political challenges caused equities to turn up negative returns of five percent during the period.

MSCI EM Currency Index gained 21.8 percent in rupee terms in 2018. The index, however, declined 4.2 percent in dollars terms. Weights of each currency in MSCI’s EM Currency Index are equal to the relevant country weight in the MSCI EM Index.

Rupee depreciation also made heavy dents in the price run-up at the stock market. Foreign investors remained on their toes and during the whole year they were net sellers of $534 million worth of shares and were net sellers during 34 continued weeks out of 52 weeks.

Major foreign selling was witnessed in banks amounting to $259 million given decline in profitability of large banks due to pension cost, higher admin costs and higher provisioning. Exploration and production sector witnessed selling of $139 million primarily due to rupee devaluation while cements sector registered an outflow of $72 million amid surge in international coal prices and inability to increase cement prices, and power generation and distribution and textile recorded selling of $34 million and $26 million, respectively.