MSCI Retains Nigeria in Benchmark Frontier Index

By Obinna Chima

The Morgan Stanley Capital International (MSCI) has said that it will keep Nigeria in its benchmark frontier-market index after saying earlier this month that it might exclude the country because of the government’s capital controls.

MSCI won’t “implement changes” for Nigerian securities in its benchmarks, including the MSCI Frontier Markets 100 Index, in its semi-annual review next month, the New York-based index provider said in a statement weekend.

The country, however, will be placed under a “special treatment,” and some individual stocks that no longer meet MSCI’s criteria may be deleted from indexes.

The MSCI is a market-capitalisation-weighted index designed to provide a broad measure of stock performance throughout the world, with the exception of US-based companies.

MSCI told Bloomberg last month it might remove Nigeria from its benchmarks because inadequate liquidity in the foreign-exchange market is making it difficult for foreign investors to buy and sell securities.

JPMorgan Chase & Co. and Barclays Plc have already dropped Nigeria’s bonds from their local-currency emerging market indexes.

According to a report by Lagos-based CSL Stockbrokers Limited, Nigeria currently makes up 11.8 per cent of the MSCI index, which had market capitalisation of $85 billion at the end of March. This puts the theoretical value of Nigeria’s share at around $10 billion. The CSL report noted that any adjustment that required investors to sell Nigerian equities would have been difficult for index followers to carry out given forex and equity market liquidity issues.

“In other words, MSCI appears to be trying to shield investors from market accessibility issues by not implementing changes,” CSL added.

It pointed out that an exclusion from the index would have forced index-following investors to face accessibility issues head on as they would have to sell Nigerian stocks.

“In reality however, we believe that investors are massively underweight Nigeria and estimates of index-tracking money in the NSE have been put at around U$500 million. Daily equity market turnover in recent weeks has averaged around $7 million.

“Once investors are out of the stock market, they would then have to face the even bigger challenge of converting the naira proceeds of these sales to forex. $500 million over 14 weeks would result in investors attempting to remit $35 million per week. Recently, the Central Bank of Nigeria has made around $180 million available to commercial banks on a weekly basis to meet total dollar demand from their clients.

“Based on the $35 million assumption above and assuming the CBN forex sales stay at current levels, foreign investors would theoretically apply for 20 per cent of total forex sales to commercial banks in the event of an exclusion from the MSCI index. We see it is as extremely unlikely that the CBN would be willing to grant foreign investors such a large proportion of overall forex available,” it added.

With all these, it noted that an exclusion from the index would have made life very difficult for index-tracking foreign investors, adding that it was possible that the MSCI wanted to avoid causing these difficulties with its latest decision.