Morgan Stanley Index May Exclude Nigeria from Emerging Markets  over Capital Controls

By Obinna Chima

Index provider, Morgan Stanley Capital International (MSCI) is seeking feedback from investors on the ease of access to the Nigerian equity market, a move that could lead to the country being excluded from MSCI’s Frontier Markets index.

The consultation followed the introduction of restrictions on foreign currency trading, MSCI said in a statement, adding that it would announce its decision on or before April 29.

The MSCI Emerging Markets Index was designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalisation index that consists of indices in 21 emerging economies.

Nigeria, Africa’s biggest economy, is facing its worst crisis in decades as the falling price of oil has slashed revenues, prompting the central bank to peg the currency and introduce curbs to protect foreign exchange reserves, which have fallen to 11-year lows.

The International Monetary Fund had called on Nigeria to lift the curbs and let the naira currency reflect market forces more closely, as the restrictions have significantly affected the private sector.

This had also led to the removal of Nigeria from JP Morgan’s Government Bond Index-Emerging Markets as well as from Barclays index.

“Nigeria will be removed from the flagship Emerging Markets Local Currency Government Index as of February 1, 2016,” MSCI said in a statement, adding that the debt would continue to be eligible for its broader Emerging Markets Local Currency Government Universal Index.

However, Reuters quoted MSCI to have said that ease of capital inflows and outflows was one of the key criteria in its market classification framework.

“Introduction of restrictive measures, such as capital or foreign exchange controls, which can lead to material deterioration of equity market accessibility, may result in the exclusion of such market from the MSCI Frontier Markets Indexes and a reclassification to Standalone Market status,” it warned.

In his reaction, the global chief economist at Renaissance Capital, Charles Robertson, said in a note yesterday that the possibility that Nigeria might lose its place in the index had been a risk since it was excluded from key bond indices by JPMorgan and Barclays last year. “Now the risk has become acute.

Robertson said: “Being excluded would create a higher hurdle to attracting future investments, as there would be no need for passive frontier market funds, which track the MSCI index, to hold Nigerian stocks.  Equity investors already have at least $0.5 billion less in Nigeria than they should have if they were exactly tracking the index (and a billion less than the $1.5billion they might have if they were optimistic and “overweight” Nigeria). Now the remaining $0.5 billion is under threat too.

“The government prefers longer-term foreign direct investment rather than more volatile foreign portfolio investors. However we suspect it is tough to attract one without the other. We think the desire for a decent return on capital is a key motivator for both portfolio and direct investors. Nigeria’s exclusion from bond indices and threatened exclusion from this key equity index, is because investors’ ability to make that return is now jeopardised by currency restrictions.

“Moreover, bond or equity index inclusion helps makes portfolio investors more sticky – they tend to invest around the benchmark weighting of a country. Indeed – Nigeria still has $0.5bn (N200billion) of equity investments in the country – because it is in this frontier index. Being excluded from such indexes creates a higher hurdle to attract future investments. Nigeria would have to become so attractive to foreign investors that they would make it an off-index investment.”

According to analysts, Nigeria’s hopes of attracting private sector investors have been dealt another blow.