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Index provider MSCI Inc. downgraded Pakistan to a frontier market, four years after its ranking was raised to an emerging market.

“Although the Pakistani equity market meets the requirements for market accessibility under the classification framework for emerging markets, it no longer meets the standards for size and liquidity," according to a statement by MSCI. The proposal is to be implemented with the November semi‐annual index review, MSCI said. 

The decision has been expected since Pakistan started falling below the MSCI’s criteria in terms of size and liquidity after its promotion to an emerging market in 2017. The South Asian nation’s benchmark KSE-100 Index rose to a record in the run up to the upgrade but slumped into a bear market soon after.

A corruption scandal involving then Prime Minister Nawaz Sharif sent foreigners on a selling spree. Overseas investors have sold shares worth more than $1 billion since the upgrade. The KSE-100 is down 12% from its record high.

“After Pakistan’s downgrade, passive investors will have to sell around $100 million worth of shares in total, when the change becomes effective," Brian Freitas, a New Zealand-based analyst who publishes on independent research website Smartkarma, said by phone before the decision.

Pakistan has a weight of 0.02% in the MSCI Emerging Markets Index, according to data compiled by Bloomberg. The MSCI Pakistan Index is made up of Lucky Cement Ltd., MCB Bank Ltd. and Habib Bank Ltd. Since Nov. 2019, none of them have met the size or liquidity criteria, MSCI said. 

There is a silver lining. Pakistan will be a bigger presence on the MSCI Frontier Markets Index with a weight of 2.3%, according to an MSCI simulation based on data until April 19. The change will see funds increase their Pakistan holding to 10% within a year, said Mattias Martinsson, chief investment officer of Tundra Fonder AB .

Frontier market “investors have longed for liquidity and more classic frontier stories," he said. “They will find both in Pakistan."  

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