The Pakistan Economy On The Rise, Thanks To CPEC [ANALYSIS]

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The economy of Pakistan is on the rise as CPEC opens doors to foreign investors.

In what has become a major victory for the Pakistani economy, U.S.-based Morgan Stanley Capital International (MSCI) reclassified Pakistan as an emerging market after categorizing it among frontier markets for the past nine years.

As the benchmark KSE-100 index skyrocketed 400 points to reach 52,700 level at the open earlier this week, a new all-time high, the MSCI upgraded the Pakistan Stock Exchange (PSX) to Emerging Market status. That paved the way for foreign investors that track the index and have between $1.4 trillion and $1.7 trillion available.

The big news for the Pakistani economy comes as the country is set to soak up the economic benefits of the China-Pakistan Economic Corridor (CPEC), which has for months been one of the most talked about topics among foreign investors.

Pakistan to generate $200 million to $500 million in investment inflows

MSCI, a leading international index provider, upgraded Pakistan to Emerging Market status from Frontier Market status where it has been since the global financial crisis in 2008. The major changes announced in MSCI’s indexes come as part of its May 2017 Semi Annual Index Review.

The reclassification of Pakistan will most likely bring foreign investors to the South Asian country, which is already facing an influx of foreign investments thanks to the CPEC projects. Most foreign institutional investors place a high value on MSCI indexes, as the index provider creates balanced portfolios that can generate maximum returns while listing all possible risks.

MSCI’s decision to reclassify Pakistan as an Emerging Market brightens the future for the country’s economy, as it is expected to generate inflows of investments in the range of $200 million to $500 million, according to the Tribune, which cites JS Global Research.

Pakistan: top performing market in Asia, flaunts strong economic performance

Credit Suisse Group, a leading global financial services company headquartered in Zurich, Germany, estimates a pro-forma weight of ~16 bp for Pakistani constituents in the Emerging Market Index, according to the firm’s research paper entitled “Pakistan Market Strategy.” According to Credit Suisse’s estimations, the upgrade to Emerging Market status is expected to drive about $270 million of passive flows in the standard and small cap index.

MSCI’s decision to reclassify Pakistan as an Emerging Market spurred the KSE-100, raising it 8.6% in 2017 alone. The increase would be much greater, but political uncertainty over the Panama case prevented the KSE-100 from soaring even higher. Since late April, the KSE-100 has skyrocketed by over 10%, with leading brokerage houses and economic analysts projecting the upward trend to continue.

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In 2016, Pakistan became the top-performing market in Asia, with a whopping 46% return, and also maintained its dominance in the MSCI FM Index. Many analysts insist that Pakistan’s economic success stems from strong cash liquidity due to soft interest rates and growing investor confidence, which in part is motivated by the country’s ambitious projects under CPEC. The rebound in oil prices and the improving security situation in the country have also played a big role in its strong economic performance.

Pakistan had been one of the MSCI Emerging Markets for 14 years, from 1994 to 2008, before the temporary closure of the Karachi Stock Exchange in the wake of the global financial crisis prompted MSCI to remove it from the EM Index. Pakistan was then classified as a “standalone country index” for nearly a year before MSCI reclassified it as a Frontier Market in May 2009.

Pakistan’s economic growth driven by CPEC in number

MSCI’s decision also adds six large-cap stocks to the MSCI Pakistan Index starting June 1. The six stocks are: Oil and Gas Development Company; Habib Bank Limited; United Bank Limited; Lucky Cement; MCB Bank; Engro Corporation.

That’s good news for Pakistan and its economic performance, as each of the six large-cap stocks are well positioned for growth. Credit Suisse estimated during its Asian Investment Conference in March that Lucky Cement would experience growth due to the domestic demand momentum that is being spurred by rising private construction and infrastructure spending under CPEC.

The strong positioning in Engro’s agriculture, foods & beverages, and energy businesses, opens the door for further growth, as the corporation serves as prime beneficiary of CPEC via its Thar coal power projects. Habib Bank Limited – Pakistan’s banking giant – is, meanwhile, estimated by Credit Suisse to have the fastest growth in current accounts and fee income over the past five years, the two factors that have been leveraged to growth opportunities under CPEC.

Pros and cons of investing in Pakistan

The Pakistani economy also greatly benefits from the Chinese investment pouring into it, with the Pakistani stock market positively reacting to foreign investments from its CPEC partner. Interestingly, not all of the Chinese investment in Pakistan is part of CPEC, which suggests that China is interested in boosting the Pakistani economy for decades to come rather than simply using it as means to serve the large appetites of its One Belt, One Road initiative, which has CPEC as one of its sub branches.

CPEC, which now brings in $54 billion of China’s investments, is arguably the healthiest solution for economic growth in Pakistan’s history. Under the ambitious CPEC projects, Pakistan not only gets to once and for all put an end to one of the biggest obstacles for economic growth – energy shortages – but also receive enormous foreign investments from around the world.

Pakistan is also becoming an attractive investment opportunity for foreign investors due to positive estimations from the Asian Development Bank, which expects the Pakistani economy growth rates to rise to 5.2% in 2017 and 5.5% in 2018. However, there are still several risks for foreign investors to bear in mind. They are: the declining trend in Pakistan’s exports, shrinking manufacturing (13% of GDP), decreased remittances and the balance of payments under pressure.

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