The downgrade of Nigeria from ‘Frontier’ to ‘Unclassified’ market status by FTSE Russell, a subsidiary of London Stock Exchange Group, due to the nation’s foreign exchange crisis is a new source of negative sentiment that is capable of triggering equities selloff at the Nigerian Exchange Limited (NGX).
FTSE Russell said further to the ‘FTSE Equity Country Classification Watch List Status of Nigeria’ announcement published on June 30 that it had received feedback from market participants that although Nigeria had adopted a floating foreign exchange rate for the naira in the Investors’ & Exporters’ (I&E) FX Window, which is now operating on a “willing buyer, willing seller” basis, “the lack of liquidity in the I&E FX Window continues to adversely impact the ability of international institutional to replicate benchmark changes”.
It said, “Consequently, as index changes for Nigeria within FTSE Russell equity indices have been suspended since September 2022 and with no improvement in the ability of international institutional investors to repatriate capital at a foreign exchange rate that would be used in FTSE Russell equity indices, following ratification by the FTSE Russell Index Governance Board, FTSE Russell announced that the FTSE Equity Country Classification status of Nigeria will be downgraded from Frontier to Unclassified market status, with Nigerian index constituents deleted at zero value (0.0001 NGN) from the following FTSE Russell equity indices.
“Effective from the open on Monday September 18, 2023: FTSE Frontier Index Series, including the FTSE Frontier 50 Index, FTSE Ideal Ratings Islamic Index Series, FTSE/JSE All Africa Index Series, FTSE Middle East & Africa Extended Index Series, and FTSE/MV Exchange Index Nigeria will be retained in the FTSE ASEA Pan Africa Index Series, with the implementation of certain corporate events suspended until further notice.”
“The news from the UK has a negative impact on the Nigerian stock market; foreign portfolio investors are worried about the FX market,” said Olumide Adesina, a financial market analyst at Lagos-based Quantum Economics.
FTSE Russell said it will continue monitoring Nigeria and once the foreign currency delays are cleared for a period of time, the country will be assessed as a new market in accordance with the FTSE Equity Country Classification Process.
“This process will follow the standard FTSE Equity Country Classification procedure and timetable for a new market, with Nigeria required to spend a period of time on the Watch List before it is readmitted as an eligible market for the FTSE Russell equity indices,” it said.
The Central Bank of Nigeria said last week that it was making plans to clear the FX backlog in two weeks. The FX backlog, which is the unmet demand for FX by investors and exporters, is estimated at $10 billion and has resulted in huge losses by many firms, according to analysts.
Before the FTSE Russell announcement, investors in Nigeria had despite concerns around the soaring inflation, interest rate hikes and weak macroeconomic indices, shown confidence in the stock market, leading to the NGX emerging one of the best-performing exchanges in Africa during a three-month duration. This development pushed the market to its 15-year high on the back of strong positive sentiments.
Abiola Rasaq, former economists and head of investor relations for United Bank for Africa Plc, said: “It is unfortunate that FTSE is taking this decision in a transition period when the country’s FX situation is expected to get better soon, given the commitment of the new authority to improving transparency and accountability within the foreign currency and overall financial market.”
He noted that liberalisation reforms, just like any policy or strategy, hardly succeed at first contact, “and one would expect teething challenges and indeed FTSE and every market participant understand that market-oriented policies are not magic wands, hence there is always a lag period within which the policy impact would permeate the system to deliver expected result.”
“On this note, one would have expected FTSE to give more time for these policy measures from a new regime to evolve, before taking such non-routine decision,” Rasaq said.
He noted that “very limited global emerging market and frontier market funds, which have interest in Nigeria, tracks the FTSE Russell index, thus the direct impact of this development is very marginal on the Nigerian equity market and overall financial system.”
“Nonetheless, it creates a negative vibe, and may trigger bearish sentiments from investors in the MSCI Index, which has more investors compared to the FTSE Russell, especially at a time when the bullish steam in the market seems to be waning,” he added.
The stock market has seen increased selloff this week. On Tuesday, investors in Nigeria’s equities market booked further loss of N293 billion as the market recorded another session of negative close by 0.80 percent. The NGX All-Share Index and equities market capitalisation decreased from 67,296.18 points and N36.831 trillion respectively to 66,760.2 points and N36.538 trillion. The market’s return year-to-date fell to 30.26 percent.
Damilare Akinlotan, an investment and equities analyst for Risevest, said: “Removing us from these indexes means Nigerian stocks listed on those indexes will no longer be accessible to foreign investors who invest in those indexes no more FPI for our stocks listed on those indexes (no more dollar inflow for us through those channels). All Nigerian stocks listed on those indexes will be sold since they are being removed, which means a sell off on our stock market market reacted immediately yesterday and you would have noticed a drop in NGX yesterday.
“The main issue has to do with the inability of institutional investors to repatriate their funds to their parent countries; our recent FX policy was supposed to be encouraging and make FX available and accessible to these investors but it has not been so. It seems that no changes are really in sight and now they’ve decided to remove us after a period of observation — having being suspended since September last year.
“We are retained on the FTSE ASEA Pan Africa Index series though and our FX situation will be monitored, if we can resolve our FX issues we should be added back as a new market. Going forward, when the removal is effected, we should expect more sell offs.”