Friday, April 08, 2016 12:45PM /Cardinal Stone Research
MSCI Inc. (NYSE: MSCI), a leading provider of investment decision support tools worldwide is reviewing Nigeria's continued inclusion in its Frontier Market Index due to tight foreign exchange liquidity in Nigeria.
This comes after the Central Bank of Nigeria imposed measures that have limited liquidity in the spot FX market due to the slump in global oil prices as the nation relies on the commodity for forex inflows.
According to MSCI, ease of capital inflows and outflows is one of the key criteria in the MSCI Classification Framework therefore, capital restrictions as such can lead to material deterioration of the equity market accessibility and may result in the exclusion of Nigeria from the MSCI frontier market indexes and a reclassification to "Standalone Market Status".
The index provider has asked for feedback from participants on the current level of accessibility of the Nigerian Equity Market and will announce its decision on the treatment of MSCI Nigeria indexes on or before April 29, 2016.
We recall that last year after a scheduled review, the indices business units of J.P Morgan and Barclays Bank removed Nigerian bonds from their emerging markets local currency government bond index citing a lack of liquidity and currency restrictions.
Possible reactions and impact on Nigerian Equity market
As at 31st March 2016, the market capitalization of the MSCI Frontier Market Index is about US$85 billion with Nigeria accounting for 11.77% (US$10 billion). Noting that a significant number of foreign portfolio investors have exited the Nigerian stock market over the last one year, many frontier funds are considerably underweight Nigeria.
Relative to a year ago, NSE market capitalization is lower by $7.9 billion. Foreign portfolio transactions now represent about 36% of total value traded from about 73% same period last year.
It is clear therefore that the potential exit of funds from Nigeria's stock market should MSCI eventually exclude Nigeria from the frontier market index, will be substantially lower than Nigeria's current market capitalization in the index.
Nonetheless, Nigeria's exclusion from the Index would likely worsen the already dire demand-supply imbalance in the accessibility of foreign exchange.