Pakistan's Emerging Market Upgrade Will Attract More Investors
By Riaz Haq
CA
MSCI Pakistan Index will be reclassified to Emerging Markets status, coinciding with the May 2017 Semi-Annual Index Review, according to an MSCI press release on June 14, 2016 .
Emerging Market Upgrade
Pakistan's Karachi Stock Exchange KSE100 Index has rallied 14% in 2016, making it Asia's best performing market so far this year in anticipation of the MSCI announcement.
Source: Bloomberg
The upgrade could attract additional $475 million of inflows by the middle of next year as investors rush to buy Pakistani shares, according to analysts quoted by Bloomberg News .
Pakistan was classified as Emerging Market after President Pervez Musharraf took power in Islamabad. It was downgraded to frontier status in December 2008, four months after the former president was forced out by PPP and PMLN politicians.
Loss of investor confidence after Musharraf's departure triggered a major bear market that wiped out nearly $37 billion of market capitalization at the Karachi Stock Exchange. It led to the imposition of a floor on share prices that caused near total paralysis of market activity for more than three months, according to Bloomberg News.
Pakistan is seeing soaring foreign direct investment (FDI) with improving security and the start of several major energy and infrastructure projects as part of China-Pakistan Economic Corridor (CPEC) , according to the UK's Financial Times business newspaper.
A New High in FDI
The year 2015 was a bumper year for foreign investment pouring into Pakistan, says the Financial Times . The country saw 39 greenfield investments adding up to an estimated $18.9 billion last year, according to fDi Markets, an FT data service. This is a big jump from 28 projects for $7.6 billion started in 2014, and marks a new high for greenfield capital investment into the country since fDi began collecting data in 2003.
The number of projects in 2015 is the largest since Pakistan attracted 57 greenfield projects back in 2005 on President Musharraf's watch . China is now the top source country for investment into the country, surpassing the second-ranked United Arab Emirates, primarily due to its investments in power.
Major CPEC Projects
China's Shanghai Electric, a power generation and electrical equipment manufacturing company, announced plans last year to establish a 1,320 megawatt coal-based power project in Thar desert using domestic coal, scheduled to launch in 2017 or 2018. Traditional energy and power projects made up two-thirds of last year’s total greenfield investment into Pakistan at $12.9 billion with alternative energy bringing in a further $1.8 billion.
Among the more notable projects, UAE-based Metal Investment Holding Corporation announced plans to partner with Power China E & M International to invest $5 billion to build three coal-fired plants at Karachi’s Port Qasim. In addition, the transportation sector is also showing promise, with 12 projects totaling $3 billion being announced or initiated last year.
Special Economic Zones
Beyond the initial phase of power and road projects, there are plans to establish special economic zones in the Corridor where Chinese companies will locate factories. Extensive manufacturing collaboration between the two neighbors will include a wide range of products from cheap toys and textiles to consumer electronics and supersonic fighter planes .
The basic idea of an industrial corridor is to develop a sound industrial base, served by competitive infrastructure as a prerequisite for attracting investments into export oriented industries and manufacturing. Such industries have helped a succession of countries like Indonesia, Japan, Hong Kong, Malaysia, South Korea, Taiwan, China and now even Vietnam rise from low-cost manufacturing base to more advanced, high-end exports. As a country's labor gets too expensive to be used to produce low-value products, some poorer country takes over and starts the climb to prosperity.
Once completed, the Pak-China industrial corridor with a sound industrial base and competitive infrastructure combined with low labor costs is expected to draw growing FDI from manufacturers in many other countries looking for a low-cost location to build products for exports to rich OECD nations.
Key Challenges
While the commitment is there on both sides to make the corridor a reality, there are many challenges that need to be overcome. The key ones are: maintaining security and political stability, ensuring transparency, good governance and quality of execution. These challenges are not unsurmountable but overcoming them does require serious effort on the part of both sides, particularly on the Pakistani side. Let's hope Pakistani leaders prove up to these challenges.
Summary
Pak-China economic corridor is a very ambitious effort by the two countries that will lead to greater investment and rapid industrialization of Pakistan. Its successful implementation will be a game-changer for the people of Pakistan in terms of new economic opportunities leading to higher incomes and significant improvements in the living standards of ordinary Pakistanis. It will be in the best interest of all of them to set their differences aside and work for its successful implementation.
