Major equity index downgrades Nigeria

FTSE Russell has demoted Nigeria to an “unclassified” market because of longstanding foreign exchange problems, but critics say President Bola Tinubu has already begun to address the issue.


Image : Gorodenkoff / Adobe Stock

FTSE Russell, a subsidiary of the London Stock Exchange group and a provider of market benchmarks and analytics, has downgraded its classification of Nigeria from “frontier” to “unclassified” market in a move that could dent foreign inflows into Nigerian stock exchanges.

As of 18 September, Nigerian indices will no longer be represented in the FTSE Frontier Index Series, which includes benchmarks such as the FTSE Frontier 50 Index, the FTSE/JSE All Africa Index Series, and the FTSE Middle East and Africa Extended Index Series.

These indices are used by traders and investors around the world to help them track the performance of different markets. Financial products such as index funds and exchange-traded funds (ETFs) also track FTSE Russell benchmarks and therefore buy or sell stocks when they are added or removed from the indices.

FTSE Russell announced that it taken the decision to demote Nigeria to an “unclassified” market because of the country’s longstanding foreign exchange difficulties. Since 2020, foreign investors have found it increasingly difficult to repatriate capital from Nigeria because of capital controls and a shortage of US dollars.

Some estimates put the figure of stranded foreign capital as high as $10bn. Nigerian President Bola Tinubu has tried to reform the country’s foreign exchange market by devaluing the naira and replacing the former system of multiple exchange rate “windows” with a single unified rate.

The move to downgrade Nigeria to an “unclassified” market could inflict both reputational and practical damage on Nigerian stock markets. A demotion could create the perception, fairly or otherwise, that Nigerian markets are higher risk than other emerging markets in Africa and consequently disincentivise traders from investing in Nigerian stocks. Practically, the reclassification will mean that index funds and ETFs tracking any of the indices in the FTSE Frontier Index Series will sell-off any exposure to Nigerian stocks.

The impact has already been felt on the Nigerian Stock Exchange All Share Index, which declined on the back of the news before rebounding. Longer-lasting declines could be in store should index funds and ETFs sell Nigerian stocks en masse next week when the reclassification formally takes place.

Signs of improvement

But have been encouraging signs that Tinubu’s recent moves could help to resolve the situation. Earlier this week, President Tinubu struck a deal in Abu Dhabi with the president of the United Arab Emirates, Mohamed bin Zayed Al Nahyan, to bring Etihad and Emirates Airlines’ services back to the country.

In August 2022, Emirates suspended all flights to and from Nigeria because of its inability to repatriate $85m worth of funds. The deal could include financial mechanisms to allow Emirates to take its cash out of the country, potentially suggesting the new administration is taking a more accommodative approach to foreign investors. The new deal will also include the launch of a new a joint foreign exchange liquidity programme with the UAE, details of which will be announced in the coming weeks.

Given these developments, members of the Association of Capital Market Academics of Nigeria (ACMAN) have criticised FTSE Russell’s decision. “We think this is a premature move on the part of FTSE Russell, which has not allowed sufficient time for the forex reforms introduced by the government to mature,” the group’s president, Uche Uwalke, said in a press conference in Abuja earlier this week.

Status could be reconsidered

FTSE Russell has said that should these reforms yield results, Nigeria’s status could be reconsidered but that it “will be assessed as a new market.”

“FTSE Russell will continue monitoring Nigeria and once the foreign currency delays are cleared for a period of time, Nigeria 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,” the organisation said. 

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Harry Clynch

Harry is Finance Reporter at African Business.