Forex Liquidity Woes, MSCI Downgrades Nigeria

In a significant development for Nigeria’s financial markets, MSCI Inc., a popular provider of investment decision tools and services, has made an important announcement. The MSCI Nigeria Indexes, previously classified in the Frontier Markets category, have been reclassified within the Standalone Market group. This reclassification comes as a response to pressing challenges in the Nigerian market, particularly pertaining to liquidity issues within the foreign exchange (FX) market.

The decision to reclassify Nigeria to Standalone status was not taken lightly. The ongoing liquidity challenges in the FX market have been a persistent issue, impacting accessibility to the Nigerian equities market. Since 2020, these challenges have also posed difficulties in replicating and investing in the MSCI Nigeria Indexes for international institutional investors. Despite extended consultations aimed at resolving these issues, no substantial improvements in FX liquidity were observed, ultimately prompting the reclassification.

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As part of this significant shift, MSCI will remove Nigerian securities from the MSCI Frontier Markets Indexes, setting their value effectively to zero as of the close of February 29, 2024.

Expert Opinions

This reclassification has cast a shadow on Nigeria’s financial image, but experts believe that the repercussions may be short-lived. Foreign investor participation in the Nigerian stock exchange has steadily waned throughout 2023. As of September 2023, foreign participation amounted to a mere 11.91%, valued at NGN 258.02 billion, marking the lowest level in over sixteen years.

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The affected index includes several major stocks such as MTNN, DANGCEM, GTCO, ZENITHBANK, SEPLAT, NB, NESTLE, STANBIC, and BUACEMENT. This reclassification signifies a turning point for the Nigerian financial landscape, with implications yet to fully unfold.