In its Market Classification Review for 2020, index compiler Morgan Stanley Capital International (MSCI) announced that the equity markets in Nigeria, Bangladesh and Lebanon will not be removed from the Frontier Markets list, but will be closely monitored on liquidity and accessibility of their markets.

All three countries have seen a deterioration in their liquidity markets over the past few months:

• Nigeria’s equity market has been impacted by a significant deterioration of liquidity in the Nigerian FX market, which has experienced massive speculation, hoarding and panic buying, subsequently putting the Naira under pressure.
• Lebanon has been subject to capital controls since October 2019 in an emergency measure on the movement of capital within the country, which has exacerbated its ongoing crisis.
• Bangladesh introduced a floor price applicable to all securities on the Dhaka Stock Exchange in March 2020, which has led to a significant fall in trading liquidity.

Despite these issues, MSCI has stated that Nigeria, Bangladesh or Lebanon will not have their Frontier Market status removed, as well as applying “special treatment” in order to control the number of changes relating to these countries in upcoming index reviews:

“While such accessibility issues may be viewed by market participants as part of
the inherent characteristics of Frontier Markets, these developments have a
negative impact on the replicability of the indexes. Therefore, MSCI will
continue classifying these markets as Frontier Markets until further notice,
while applying a special treatment to potentially reduce the number of changes
in the related indexes and mitigate the index replication concerns.”

There will be no changes in the MSCI Nigeria, Bangladesh or Lebanon Indexes while the special treatment remains in place, as well as any indexes that these securities reside in such as the MSCI Frontier Markets 100 Index, MSCI Factor Indexes and MSCI Thematic Indexes.

In relation to corporate events, MSCI said the following:

“MSCI will also specifically defer the implementation of corporate events not
requiring a Price Adjustment Factor (PAF), such as placements, block sales,
recapitalizations, sizable IPOs and will exceptionally freeze potential
migrations due to corporate events until further notice for the MSCI Bangladesh,
MSCI Lebanon and MSCI Nigeria Indexes. By contrast, MSCI will continue
implementing corporate events requiring PAFs, such as stock splits,
consolidations, rights issue, buybacks as well as deletions resulting from
delisting, bankruptcies, merger and acquisitions as well as prolonged
suspensions at the time of the event.”

MSCI will continue to monitor the progress of these three markets and “welcomes feedback” from market participants on the level of accessibility of equity markets. In the event of further deterioration of market accessibility, MSCI may reclassify Nigeria, Bangladesh or Lebanon from Frontier Market status to Standalone Market status as soon as practicable. MSCI will provide sufficient lead time prior to implementation if such a situation does occur.

This isn’t the first time Nigeria’s position as a Frontier Market has been under scrutiny. MSCI had previously launched a consultation in March 2017 on potentially demoting the African nation to Standalone Market status due to the degradation of market accessibility and reduction of foreign exchange market liquidity due to restrictions that were in place. MSCI decided against stripping it of its Frontier Market status after consulting with the relevant market participants.