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Pakistan Became an MSCI Emerging Market in 2016 While China Didn’t. Here’s Why.

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Pacific Money

Pakistan Became an MSCI Emerging Market in 2016 While China Didn’t. Here’s Why.

Despite continuing political challenges, investor perceptions of Pakistan are swiftly changing.

Pakistan Became an MSCI Emerging Market in 2016 While China Didn’t. Here’s Why.
Credit: Kashiff via Wikimedia Commons

During MSCI’s Annual Market Classification Review, Pakistan came out a big winner. Morgan Stanley Capital International recently upgraded Pakistan to the emerging markets (EM) index, a feat that even China failed to pull off.

As The Diplomat discussed last month, the global index provider refused to add China’s Class-A mainland shares to the EM index, citing market accessibility issues in the country as the reason for the refusal. Though they assured that Chinese A shares will again be reviewed in the 2017 cycle, for now the decision lends a blow to China’s ambition to join international capital markets.

On the contrary, for Pakistan, this inclusion in the EM index brings forth a golden opportunity, despite the fact that it accounts for only 0.19 percent of the weight in the EM index as compared to the 8.8 percent it held in the MSCI Frontier Index. While critics remain wary due to Pakistan’s almost non-existent position in the index as compared to the FM index, where Pakistan stood as the fourth largest country, many remain hopeful that the inclusion indicates a significant shift in investor perception about Pakistan’s market credibility.

And this shift in perception is not just limited to the country’s market credibility and stability. Over the last few years, Pakistan has managed to stay in the news for all the right reasons. The country has found the perfect balance between economic and political stability after its civilian leadership decided to band its forces with the much more influential and powerful armed forces. Ever since then, Pakistan has projected positive economic indicators, a fact now acknowledged by the international community.

In 2015, Daniel Runde, a Forbes contributor, termed Pakistan the “next success story,” taking note of the country’s improving security situation while praising the prime minister for “working in tandem with the military to deliver peace and security.” Along similar lines, a story by Bloomberg focused on the country’s improving security situation and how that led to a boost in business activity in the real estate industry. Citing as its source, the report claimed that average prices in Karachi rose by 22 percent and by 14 percent in Lahore in a year’s time.

More recently, the Financial Times carried a story about Pakistan making a strong case for the MSCI upgrade this year. In its own words, “Terrorism-related deaths have fallen by 74 percent from their 2010 peak, economic growth has accelerated to a solid 4.5 percent, inflation has fallen sharply to around 3.3 percent and the fiscal deficit has narrowed markedly to around 4.1 percent of gross domestic product.”

Additionally, praising Pakistan’s improved security situation, FT also shared a quote from Charles Robertson, a global chief economist, who analyzed that “on a per capita basis, the likelihood of being killed by a gun in the U.S. is now higher than that of dying as a result of terrorism in Pakistan.”

While these positive outcomes have given the masses relief, they have also improved the country’s economic prospects. Apart from the multi-billion dollar China-Pakistan Economic Corridor projects, which are a game changer for the country, especially for the often-ignored Balochistan region, other international giants are now eyeing the Pakistani market with renewed interest.

Just recently, Engro Corporation, Pakistan’s only MNC, sold 51 percent of its shares to a Dutch dairy company for an estimated $448 million. It also sold 28 percent of its shares in Engro Fertilizers to institutional and high net worth individuals in a deal worth approximately $185 million. In another deal, Dawlance, a once privately owned company of white goods, got acquired by Arcelik, a Turkish company, for a sum of $258 million.

Apart from these acquisitions, German company Bosch opened its doors in Lahore. Describing Pakistan as an “interesting market,” Ina Lepel, German ambassador to Pakistan, said that due to its growing population, the country cannot be ignored by other multinational companies. BSH Hausgeräte GmbH, the largest manufacturer of home appliances in Europe, which is also a subsidiary of the Bosch Group, termed Pakistan a “potential business destination.”

Moreover, thanks to favorable policies that are wooing international car manufacturers with generous import duties, Audi has decided to enter Pakistan. Initially, the German automobile company will test the popularity of its cars through exports of Completely Built-up Units (CBU). If that works out, the next phase is to establish an assembling unit in the country. Renault-Nissan is also considering a plant; Suzuki, meanwhile, said it may inject a further investment of $460 million for a new factory in the country.

While the above mentioned are good examples of Pakistan’s turning fortunes, there is an aspect worrying analysts: decreasing FDI. According to a Reuters report, Pakistan’s $250 billion economy is growing at its fastest pace in eight years. Yet, despite all the positive indicators, the FDI inflows are much lower than the country’s overall requirements. Although during the first eleven months of fiscal year 2016 FDI inflows increased by 10 percent as compared to the same period in 2015, FDI still amounted to a total of $1 billion, which, according to economists, is very low.

Many analysts believe that the absence of a long-term foreign investment policy in the country is fueling the uncertainty investors feel regarding the Pakistani market. Moreover, while the on-ground situation of the country is now better, the prior terror-filled image of Pakistan continues to pose hurdles. Experts believe that it will take a considerable amount of time for investors to place their trust in this once-volatile market.

However, the MSCI upgrade might play a crucial part in reinventing the once-tainted image of Pakistan. Its effects have already started to show. While the country expects to attract FDI capital of $570 million, many place the figure as high as $4.4 billion. Moreover, rumors have circulated of a Pakistani and three foreign investors seeking to acquire a stake of up to 40 percent in the Pakistan Stock Exchange (PSX).

Undoubtedly, the fate of the country is tied with its security situation, especially in its economic hub of Karachi. And, so far, the unlikely but welcome “partnership” between the two Sharifs (the prime minister and the chief of army staff) has proved fruitful for the country. So far, the partnership appears to be intact, if not growing stronger.

With the more influential Sharif’s tenure nearing an end in November, many are uncertain about the fate of the country and how it will fare in a post Raheel-era. However, for now, they can rest with the knowledge that despite a few hiccups, Pakistan is on the right trajectory to economic and political bliss.