Pakistan may come under scrutiny again


KARACHI: Pakistan is expected to once again come under scrutiny in the Morgan Stanley Semi Annual Index Review May-2020 for a potential downgrade from Emerging Markets to Frontier Markets, analysts said.

Morgan Stanley Capital International (MSCI) is expected to announce May-2020 Semi Annual Index Review (SAIR) on May 12, 2020, which will be effective from June 1, 2020.

As per an announcement on April 08, 2020, MSCI intends to follow its Global Investable Market Indexes (GIMI) Methodology and implement the May-2020 SAIR as scheduled.

However, MSCI will continue to monitor market conditions in the coming weeks and will consider postponing or canceling the May 2020 SAIR only if warranted by extreme market conditions.

MSCI was also expected to add Kuwait to Emerging Markets during the May 2020 SAIR (expected weight 0.5 percent), however this has also been postponed till November 2020 SAIR due to the impact of COVID-19 pandemic on the preparedness of international institutional investors.

“We expect Pakistan to once again come under scrutiny in the review for a potential downgrade from Emerging Markets to Frontier Markets, with Pakistan’s weight estimated at 0.05 percent,” Syed Atif Zafar, at Topline Securities said in a research report issued Thursday.

All the three constituents from Pakistan (OGDC, MCB and HBL) do not meet the minimum free-float capitalization criteria of $776 million, while only OGDC meets the full market capitalization criteria of $1,551 million, he said adding that of the three constituents, OGDC and MCB meet the MSCI’s Buffer Rule of 2/3rd of full market capitalization.

“In spite of this, we believe the probability of a downgrade of Pakistan is low given that MSCI may apply the Index Continuity rule and take into consideration the impact of COVID-19 - as visible from April 8 announcements mentioned earlier,” he said.

This index continuity rule will be applied if any one of the existing three stocks fall below the 2/3rd requirement of full market capitalization, he believed. The largest securities by free float capitalization among the securities included in MSCI Pakistan’s Market Investable Equity Universe (19 securities) will be added to the Standard Index in order to reach the minimum three constituents. This could potentially result in ENGRO replacing HBL in the Index.

In a worst case scenario, Pakistan is less likely to be imminently downgraded to FM, as MSCI is likely to involve a public consultation, before announcing any downgrade of Pakistan to FM.

“Our view is based on analysis of several countries (Argentina, Jordan, Morocco, Egypt, Peru and Greece) which were at risk of being demoted in past,” he said.

MSCI is also expected to announce results of the consultation on Argentina in Jun-2020, which will be communicated as part of the MSCI 2020 Market Classification Review. MSCI intends to continue classifying the MSCI Argentina Indexes as part of Emerging Markets until the end of the consultation period (started in Sep-2019).

However, in the event of further deterioration in market accessibility which leads to replicability issues for the MSCI Argentina Indexes, MSCI may decide to reclassify the MSCI Argentina Indexes at an earlier date. Any such decisions by MSCI would be preceded by a public consultation.