Foreign index provider MSCI has reclassified Pakistan as an emerging market. This new status was given to the country in May of the current year before it remained classified as a frontier market for the longest time.
By definition, frontier markets are less economically developed and carry higher risk, compared to other markets. On the other hand, investors feel more confident while investing in emerging markets, owing to lesser risk involved with them,
For a long time, Pakistan remained a favorite of a lot of foreign countries until 2008, when financial crisis hit the market quite hard and over the several subsequent years, the market remained highly unstable.
Despite the challenging market situation, Pakistani companies continue to perform quite well, and now finally, the market has been reclassified and has gained the status it had since 1994.
Talking about the transition period of Pakistan, Arian Mowat, an equity strategist at J.P. Morgan, said that a buffer period was necessary for investors to have the assurance that the (stock) market will not collapse again. ‘That’s an interesting lesson from Pakistan…’ he added.
So far this year, the Pakistani KSE100 index has gone up by 14 percent. This has made the stock market a front runner among all stock markets in Asia.
For Pakistan, this reclassification hints at the probable inflow of money into the country. This is because the funds that track the emerging-market indexes ought to buy stocks in the country. As a result, more Pakistani currency will be bought to buy stocks, leading to the inflow of even more foreign currency into the Pakistani market.
The foreign currency so received will play a vital role in upholding the country’s economy. A portfolio manager at Matthews Asia, Satya Patel, is of the view that a sufficient stack of foreign currency streamlines the flow of imports as well as helps support the home currency.
This stack of foreign cash can only also be used to maintain forex reserves, which, in turn, can help the country restore confidence of foreign investors and emerge unscathed during the times of the political and economic crises.
Apart from index-related purchases, through this newly-gained status, the country can create more investment opportunities for foreign investors.
It is also worth mentioning that the country did prove its potential over the transition period, from being a frontier market to an emerging one, in less than a decade to regain the confidence of foreign investors.
This latest reclassification will attract more foreign investors and is hoped to steer the country’s fragile economy back on track. At this point, inflow of the money into the country is essential. The volatile exchange rate can only be stabilized if the country has enough resources to support its home currency.