Index provider MSCI announced on Tuesday that it had downgraded Pakistan to a frontier market, meaning the country had lost its four-year emerging market position.
"while the Pakistani stock market meets the market access requirements under the emerging market classification framework, it no longer meets the criteria for size and liquidity," MSCI said in a statement. MSCI said the adjustment would take effect in the semi-annual index review in November.
After Pakistan was promoted as an emerging market in 2017, its size and liquidity began to fall below MSCI standards, so MSCI's decision came as no surprise. Pakistan's benchmark stock index, the KSE-100, rose to record levels before upgrading, but soon fell into a bear market.
Since the rating upgrade in 2017, overseas investors have sold more than $1 billion worth of Pakistani shares. The KSE-100 index is down 12% from its all-time high.
"Pakistan has been downgraded and when this change takes effect, passive investors will have to sell shares with a total value of about $100m," said analyst Brian Freitas Freitas.
Pakistan's weighting in the MSCI emerging markets index is 0.02 per cent. The MSCI Pakistan Index consists of Lucky Cement Ltd., MCB Bank Ltd. And Habib Bank Ltd. MSCI said none of these companies had met size or liquidity standards since November 2019.