In a significant development that could have far-reaching implications for the Nigerian economy and investment landscape, MSCI, a leading provider of critical tools and services for the global investment community, announced the reclassification of the MSCI Nigeria indexes.
The country’s status has been changed from Frontier Markets to Standalone Markets.
This news comes just a month after FTSE Russell, another global index provider, downgraded Nigeria from a Frontier Market to an Unclassified Market status in September 2023.
The Core Issue: Persistent FX Liquidity Problems
The primary reason cited by MSCI for the reclassification is Nigeria’s ongoing struggle with foreign exchange (FX) liquidity.
- Both MSCI and FTSE Russell pointed to these FX issues as significant barriers for foreign investors seeking to enter or exit the Nigerian equities market.
- This decision was made after an exhaustive consultation period that lasted from June 2022 to September 2023, aimed at carefully evaluating the country’s FX situation.
- The consultation was also designed to give the government time to stabilize the FX market through recent policy reforms.
Despite these efforts, which included bold FX policy reforms, the FX liquidity problems have persisted, leading to MSCI’s decision to reclassify Nigeria.
- “While we acknowledge the attempts by the Nigerian government to stabilize the FX market, our evaluation suggests that the challenges remain significant, affecting investor confidence and market accessibility,” MSCI said in an official statement.
The Immediate Impact on Nigerian Securities
As a direct consequence of this reclassification, MSCI will remove several major Nigerian securities from the MSCI Frontier Markets Indexes.
- Companies like Dangote Cement (DANGCEM), MTN Nigeria (MTNN), Guaranty Trust Holding Company (GTCO), Zenith Bank (ZENITH), Seplat Petroleum (SEPLAT), Stanbic IBTC (STANBIC), Nestlé Nigeria (NESTLE), Nigerian Breweries (NB), and BUA Cement (BUACEMENT) will be valued at effectively zero as of the close of February 29, 2024.
- This move could potentially lead to a significant outflow of foreign investment from these companies and the Nigerian market as a whole.
The Broader Implications
While the immediate impact on individual companies is worrying, the larger issue is how this reclassification affects Nigeria’s perception of the global financial market.
- It serves as a critical indicator of the country’s economic health and could deter foreign direct investment (FDI), especially when considered alongside the recent downgrade by FTSE Russell.
- For Nigeria to regain its earlier classification and attract more global investors, resolving the persistent FX liquidity issue is imperative.
- There’s a need for the Nigerian government and its financial regulators to go back to the drawing board and assess the effectiveness of the recent FX liberalization policies critically.
The present economy downtrend caused due to the FX liquidity crisis could lead this nation into a severe hardship, the Government really needs to hasten the FX liquidity crunch intervention plans now sooner than later.