Following the sustained liquidity challenges in the country’s foreign exchange (FX) market, FTSE Russell Group has decided to downgrade Nigeria from “Frontier to Unclassified Market Status” as well as delete its index constituents at zero value from the FTSE Russell equity indices.
The group stated that the country’s downgrade became inevitable as “index changes for Nigeria within FTSE Russell equity indices have been suspended since September 2022 and with no improvement in the ability of international institutional investors to repatriate capital at a foreign exchange rate that would be used in FTSE Russell equity indices.”
This is coming on the heels of the Central Bank of Nigeria (CBN), directive on Tuesday that all banks should build capital buffers to increase resilience against potential volatility and economic shocks.
FTSE Russell is a subsidiary of London Stock Exchange Group that produces, maintains, licenses, and markets stock market indices. The division is notable for the FTSE 100 Index and Russell 2000 Index, among others.
Nigeria’s downgrade, which had reportedly been ratified by the FTSE Russell Index Governance Board, takes effect from September 18, 2023.
Effectively, the Nigerian index constituents would be deleted at zero value (0.0001 NGN) from five FTSE Russell equity indices, including the FTSE Frontier Index Series, the FTSE Frontier 50 Index, FTSE Ideal Ratings Islamic Index Series, and FTSE/JSE All Africa Index Series.
Others are FTSE Middle East & Africa Extended Index Series and FTSE/MV Exchange Index.
According to a report obtained by Business Standards on Tuesday, the group stated that the reclassification was further to the June 30, 2023 FTSE Equity Country Classification – Watch List Status for Nigeria, which had analysed feedback from market participants on repatriations.
The ratings agency affirmed that although Nigeria had adopted a floating FX regime for the naira in the Investors & Exporters’ (I&E) FX Window, which is now operating on a “Willing Buyer, Willing Seller” basis, the lack of liquidity in this window continued to adversely affect the ability of international institutional investors to replicate benchmark changes.
It, however, explained, “Nigeria will be retained in the FTSE ASEA Pan Africa Index Series, with the implementation of certain corporate events suspended until further notice.
“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.”
FTSE Russell had earlier explained that Nigeria was added to the watch list from September 2022, for possible reclassification from Frontier to Unclassified market status. This, it stated, was due to reports received from index users and market participants from 2020 onwards of significant, ongoing delays to the repatriation of capital from the country.
“Consequently, FTSE Russell has not implemented certain corporate events for Nigerian constituents of FTSE Russell equity indices since September 2022,” it stated.
The group added that with the support of the FTSE Equity Country Classification Advisory Committee, FTSE Russell had conveyed its concerns to the Nigerian market authorities regarding the delays to the repatriation of capital and the execution of FX transactions.
It stated, “Despite open and constructive engagement with the key capital markets institutions in Nigeria, the geopolitical and macroeconomic factors affecting the market are such that international institutional investors have yet to report any improvement to the queues to repatriate capital from Nigeria, with delays now exceeding 18 months.
“Consequently, FTSE Russell has downgraded the ‘No objection to or significant restrictions or penalties applied to the investment capital or the repatriation of capital and income’ criterion for Nigeria from a rating of ‘Restricted’ to ‘Not Met,’ effective from March 2023.”
The British investment ratings body, however, pointed out, “FTSE Russell will continue to engage with the capital markets institutions in Nigeria and provide an update on Nigeria’s Watch List status by 30 June 2023.”
Challenges in the country’s FX market have continued to attract the attention of global ratings agencies. Only last month, Standard Bank Research (SBR), a subsidiary of Standard Bank Group, identified inadequate dollar supply as key challenge in the nation’s foreign exchange market, following the recent floating of the naira.
In a report, it had noted that while the recent monetary policy actions of the CBN reinforced a continued progression towards a monetary policy stance that better aligned with the challenges of excess naira liquidity and demand for the US dollar, more still needed to be done by the monetary authority.
The SBR had expressed concern that the premium between the official exchange rate and the parallel market had widened with USD/NGN trading in the parallel market at 925 levels at the time of finalising the report, compared to 776 at the official window.
Among other things, it stated that despite persistent increases in the policy rate, monetary policy transmission had remained weak and urged the CBN to use more potent tools, such as shorter-dated, high-yielding OMOs, and increase commercial banks’ capacity to invest in the Standing Deposit Facility.