Nigeria’s stint as a Frontier Market hangs in the balance after Morgan Stanley Capital International (MSCI) launched a consultation on the potential reclassification to a Standalone Market index.

In September 2016, MSCI added its Nigeria Index to the review list to be demoted from Frontier Market to a Standalone Market index. The decision was based on the continual degradation of market accessibility and a reduction of foreign exchange (FOREX) market liquidity after restrictions were implemented in 2015. After six months on the review list, a consultation is now underway and will look at whether or not the African nation should remain as a Frontier Market.

Key Developments

In 2015, Nigeria’s central bank pegged its currency, the naira (NGN), against the dollar at 197 NGN/USD and slightly adjusted it between 197 and 199 over the course of a year. Artificially setting the rate of the naira against the dollar caused many problems for the central bank (continuously struggling to maintain adequate currency reserves), officials (who have to monitor and prevent arbitrage between the main FOREX market and parallel black market) and also the IMF (after pushing Buhari’s government to devalue its currency).

Nigeria eventually temporarily lifted the peg on the currency in June 2016, culminating in a huge depreciation and the central bank once again intervening to keep the naira at a “respectable” level of 315 NGN/USD. However, the naira continued to shed its value against the dollar in the country’s parallel market primarily due to falling oil prices, reaching a trough of around 520 NGN/USD in February 2017.

The markets have also displayed lackluster results. Over a three year period, Nigeria’s All Share Index has shed around 40% of its value mainly due to oil prices, terrorism and uncertainty over the country’s current regime. The stock change has been among the worst performing Frontier Markets in the opening two months of 2017 (January and February) and the poor performance has filtered through into exchange traded funds (ETF), with one particular ETF undertaking measures to increase its share price from record low levels.

MSCI’s Key Questions

In order to assess whether or not the Frontier Market title should be stripped from Nigeria, MSCI have asked two key questions in its consultation:

1) Do the lack of liquidity and gap between parallel and official rates (against the dollar) warrant a reclassification of the MSCI Nigeria Index to Standalone Market status? What would the appropriate timeline for the reclassification be?

Since 2010, three markets have been demoted from Frontier Market to Standalone Market: Trinidad & Tobago (2011), Ukraine (2015) and Bulgaria (2016). The common theme for these reclassification was due to steady declines in liquidity and the number of securities that MSCI deemed as “investable”.

If Nigeria suffers the same fate in MSCI’s upcoming review, then the process will probably completed over the course of a few months.

2) Given the Central Bank’s move to inject liquidity in the market, should MSCI provide more time for market authorities to find a solution?

Towards the end of February, the Central Bank of Nigeria (CBN) injected $180 million into the country’s FOREX market in an attempt to boost liquidity. The CBM then pumped a further $100 million into the interbank market on the 24th March 2017 to meet customers’ demands, but it has been reported that dealers were only able to get a hold of $81.35 million dollar.

If authorities continue to intervene and set limits instead of “freeing up” the market, then it may spell bad news and Nigeria could find itself as a Standalone Market. The CNB has recently set an upper limit of N360 per dollar for banks to sell dollars to customers and will sell to commercial banks at N357 per dollar, as well as selling a new supply of dollars for students’ overseas studies. High ranking officials have also urged President Buhari to take action to prevent the naira from declining any further.

It is unlikely that a final solution (or solutions) could be found within the next few months, but there needs to be some indication that the appropriate steps and actions are taken in order to combat the challenges that the country is currently facing.

MSCI Frontier Market Index Without Nigeria, Pakistan and Argentina

MSCI announced Pakistan will be categorised as an Emerging Market later this year and is also considering giving Argentina the same fate. Consequently, MSCI have released a simulation of the MSCI Frontier Markets Index 100.

As a result, the 11 Nigeria stocks, such as Nigerian Breweries, will be removed from the index along with those from Argentina and Pakistan. Bangladesh (16), Kuwait (15) and Vietnam (14) will have the most constituents in the index as a result of the change. Kuwait will have the the most securities in the top 10 (National Bank of Kuwait, Kuwait Finance House and Mobile Telecom Company), while only one European stock, Romania’s Banca Transilvania, will be in the Top 10.

 

Nigeria has a host of problems at the moment and a potential removal from MSCI’s Frontier Market Index will only compound these issues. Officials will need to step in as soon as possible in order to conjure up solutions to prevent this situation from deteriorating any further.

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