Karachi, June 25, 2021 (PPI-OT): Pakistan’s potential reclassification to MSCI FM on the cards

In a recent development, MSCI has initiated consultation process to migrate Pakistan from Emerging Markets (EM) to Frontier Markets (FM), targeting Nov’21 for potential reclassification with the result likely to be announced on Sep 7’21.

To highlight, Pakistan has been hanging by a thread in the MSCI EM index since Nov’18 due to index continuity rules (being classified as EM in May’17) while engrossing a weight of 0.02% as per last review (vs. 0.1% when it was initially upgraded to EM).

Proposed reclassification of Pakistan to FM from EM would seemingly fetch an indicative weight of 2.3% in FM (5.8% in MSCI FM-100) as per MSCI, which is significantly lower than ~9% when the country exited FM back in 2017. Moreover, after being downgraded from MSCI EM to standalone index, Argentina is also a potential contender for inclusion in MSCI FM which could further compress Pakistan’s weight in the index.

Assets under management of frontier funds have tumbled to US$4bn compared to US$15bn in 2014 as FM markets failed to compensate for added risks present in these markets. Even though Pakistan’s classification in FM is unlikely to bring material foreign flows in the market, we expect potential fresh allocation to FM funds unlocking increased inflows going forward.