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By Chinwendu Obienyi
Investors tracking Naira-denominated assets due to Nigeria’s classification as a frontier market might reconsider their positions as MSCI Inc, announced at the weekend that the MSCI Nigeria Indexes will be reclassified from frontier markets to standalone markets status in one step coinciding with its February 2024 Index Review.
The leading provider of critical decision support tools and services for the global investment community, in a statement, said this decision came on the back of feedback received from market participants from its recent extended consultation on a market reclassification proposal for the MSCI Nigeria Indexes.
Since March 2020, liquidity challenges in the Nigerian foreign exchange (FX) market have consistently affected the accessibility of its equity market, leading to ongoing capital repatriation concerns and a significant gap between the official and parallel exchange rates for the country’s currency.
This has caused international institutional investors to face recurring challenges with index replicability and investability of the MSCI Nigeria Indexes and other indexes they are part of.
It will be recalled that MSCI Inc, on June 22, 2023, announced that feedback from market participants obtained as part of the initial consultation conducted from June 2022 to June 2023 suggested that the limited accessibility of the Nigerian equity market would warrant the removal of the MSCI Nigeria Indexes from the MSCI Frontier Markets Indexes.
However, MSCI extended the consultation period to September 29, 2023 to allow more time for the liquidity situation in the Nigerian FX market to stabilize following measures announced by the Central Bank of Nigeria (CBN) on June 14, 2023.
The firm said, “No significant improvements in FX liquidity were observed by market participants during the extended consultation period, confirming that the ease of capital inflows and outflows in the MSCI Nigeria Indexes is not to the standards expected from Frontier Markets. This has led to MSCI’s decision to reclassify the MSCI Nigeria Indexes”.
MSCI said that in order to facilitate index replicability at the time of the reclassification, it will delete each Nigerian security from the MSCI Frontier Markets Indexes at a price that is effectively zero as at the close of February 29, 2024. It said that more information on this and other details related to the implementation of the reclassification will be shared at a date closer to the reclassification.
Reacting to the development, market analysts who spoke to Daily Sun via emails, said the reclassification might delay the return of foreign portfolio investors (FPIs) to the Nigerian market. According to them, the downgrade in classification could make it less attractive for foreign investors impacting capital inflows. Analysts at Cordros Securities said, “Simultaneously, given the MSCI’s reclassification of the Nigeria indexes from Frontier Markets to Standalone Markets status, we believe the possible return of FPIs to the Nigerian market may take longer than previously envisaged, even if FX liquidity issues abate in the near term.
This is because a sizable portion of investors currently tracking and holding naira risky assets do so (or did) due to Nigeria’s index classification as a Frontier Market”.
For his part, a stockbroker who craved anonymity, said that the reclassification of the MSCI Nigeria Indexes highlighted existing challenges in the market which include liquidity and accessibility.
He noted that while domestic investors are expected to remain influential, the return of foreign investors will surely delay. “This report is no surprise. Nigeria is clearly struggling on all forms and the new administration is yet to get a single thing right and so these issues- FX liquidity and capital accessibility, identified by MSCI will have to be addressed as it will be crucial for restoring investors’ confidence and attracting foreign investments in the future”, he said.
