Nigeria’s Stocks suffer as a result of the FTSE’s downgrade – The downgrade of Nigeria’s market status from ‘Frontier’ to ‘Unclassified’ by FTSE Russell, a subsidiary of the London Stock Exchange Group, due to the country’s foreign exchange crisis, is a new source of negative sentiment that has the potential to trigger an equities selloff at the Nigerian Exchange Limited (NGX).
FTSE Russell stated in a follow-up announcement to the ‘FTSE Equity Country Classification – Watch List Status of Nigeria’ published on June 30 that it had received feedback from market participants that, while 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
“As a result, 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, FTSE Russell announced that the FTSE Equity Country Classification status of Nigeria will be downgraded,” it said.
“Effective from the open on Monday, September 18, 2023: the FTSE Frontier Index Series, including the FTSE Frontier 50 Index, the FTSE Ideal Ratings Islamic Index Series, the FTSE/JSE All Africa Index Series, the FTSE Middle East & Africa Extended Index Series, and the 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 had 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 stated that it will continue to monitor Nigeria and that if the foreign currency issues are resolved, the country will be evaluated 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 being readmitted as an eligible market for the FTSE Russell equity indices,” the company stated.
Last Monday, the Central Bank of Nigeria announced plans to clear the FX backlog in two weeks. According to researchers, the FX backlog, which is the unmet demand for FX by investors and exporters, is estimated at $10 billion and has resulted in massive losses for many organisations.
Prior to the FTSE Russell announcement, investors in Nigeria had shown confidence in the stock market, despite concerns about soaring inflation, interest rate hikes, and weak macroeconomic indices, leading to the NGX emerging as one of Africa’s best-performing exchanges over a three-month period. On the back of strong optimistic feelings, this development pushed the market to a 15-year high.
“It is unfortunate that FTSE is taking this decision during a transition period when the country’s FX situation is expected to improve soon, given the new authority’s commitment to improving transparency and accountability within the foreign currency and overall financial market,” said Abiola Rasaq, former economist and head of investor relations for United Bank for Africa Plc.
He noted that liberalisation reforms, like any policy or strategy, rarely succeed on the first try, “and one would expect teething challenges, and indeed FTSE and every market participant understand that market-oriented policies are not magic wands, thus there is always a lag period within which the policy impact would permeate the system to deliver expected results.”
“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 a non-routine decision,” Rasaq said.
He highlighted that “very few global emerging market and frontier market funds that have an interest in Nigeria track the FTSE Russell index, so the direct impact of this development on the Nigerian equity market and overall financial system is very marginal.”
“However, it creates a negative vibe and may trigger bearish sentiments from investors in the MSCI Index, which has more investors than the FTSE Russell, especially at a time when the market’s bullish steam appears to be fading,” he added.
This week has seen an upsurge in stock market selloffs. On Tuesday, investors in Nigeria’s stocks market lost another N293 billion as the market closed down 0.80 percent for the second consecutive session. The NGX All-Share Index and equity market capitalization fell from 67,296.18 points and N36.831 trillion to 66,760.2 points and N36.538 trillion, respectively. The market’s year-to-date return has dropped to 30.26 percent.
“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,” said Damilare Akinlotan, an investment and equities analyst for Risevest. Since they are being withdrawn, all Nigerian equities listed on those indexes would be liquidated, resulting in a sell-off on our stock market – the market reacted quickly yesterday, and you would have noted a decline in the NGX.
“The main issue is institutional investors’ inability to repatriate their funds to their home countries; our recent FX policy was supposed to be encouraging and make FX available and accessible to these investors, but this has not been the case.” It appears that no changes are in the works, and they’ve opted to remove us after a time of monitoring – we’ve been suspended since September of last year.
“We are still on the FTSE ASEA Pan Africa Index series, and our currency situation will be closely monitored; if we can resolve our currency issues, we should be added back as a new market.” When the removal is completed, we should expect more sell-offs.”