By Chinwendu Obienyi
Following recent developments in the FX market, MSCI Inc has announced that it will extend its consultation on the potential reclassification of the Nigeria Indexes from the frontier to standalone market status. The index had in 2022, threatened to downgrade Nigeria’s indexes as a result of the Central Bank of Nigeria (CBN)’s capital control measures that made it difficult for foreign investors to repatriate foreign currency offshore.
According to the index, since the onset of these issues in March 2020, there have been constraints in US dollar liquidity in the market, leading to constant capital repatriation concerns and a gap between the parallel and official exchange rates for the Naira.
It said that the situation persistently caused index replicability and investability issues for international institutional investors while adding that FX liquidity issues have continued to impact the accessibility of the Nigerian equity market.
“The feedback from market participants obtained as part of the consultation suggests that the limited accessibility of the Nigerian equity market, resulting from a lack of liquidity on the FX market, would warrant its removal from the MSCI Frontier Markets Index,” it said.
It however announced that it will decide to adopt the “wait and see” method to gauge how the new development in the foreign exchange market will play out for foreign investors with interest in Nigerian assets.
“MSCI will continue to consult with market participants on the potential reclassification of the MSCI Nigeria Indexes until September 29, 2023, and will announce the results of the consultation on or before October 31, 2023,” it said in a statement.
It will be recalled that the CBN on June 14, announced operational changes to the FX Market, effective immediately.
Such changes include, amongst others, the abolishment of the previous FX market segmentation, merging all sectors into the Investors and Exporters Window, and the reinstalment of the “Willing Buyer, Willing Seller” model with no rate cap.
Speaking in a statement, Global Head of Index Management Research and a member of the MSCI Index Policy Committee, Jean-Maurice Ladure, said the index decided to extend the consultation to allow more time for the liquidity situation in the Nigerian FX market to stabilize.
“We will evaluate the impact of these measures in the context of market accessibility, in particular the impact on the clearing of the FX queue during the capital repatriation process.
If such improvements were not to be observed by market participants during our extended consultation period, it would confirm that the ease of capital inflows and outflows in the MSCI Nigeria Indexes is not to the standards expected from Frontier Markets.” Ladure said.