FTSE Russel’s Downgrade of Nigeria’s Frontier Status Rocks Capital Market

CAPITAL MARKET

As the downgrade of Nigeria’s Frontier status by FTSE Russel took effect last week, Kayode Tokede examines its implication on the stock market and what is required by stakeholders to address the foreign exchange crisis in the domestic economy

FTSE Russel, the subsidiary of the London Stock Exchange Group (LSEG), in its latest report, downgraded Nigeria from a frontier status market to an unclassified market status over the foreign exchange crisis in the nation’s economy. 

Analysts described the action as a new source of negative sentiment that is capable of triggering a stock sell-off at the Exchange.

When the report hit the stock market on Monday, September 11, 2023 investors’ negative sentiment rocked some of the listed fundamental stocks as the overall market capitalisation dropped by N757 billion. 

The stock market had closed September 8, 2023, at N37.295 trillion, dropped by 2.07per cent or N757 billion to close at N36.538 trillion on Tuesday, September 12, 2023.

The downgrade began to take effect from September 18, 2023, when Nigerian index constituents will be deleted at zero value from the FTSE Frontier Index Series, including the FTSE Frontier 50 Index, FTSE Ideal Ratings Islamic Index Series, FTSE/JSE All Africa Index Series, FTSE Middle East & Africa Extended Index Series and FTSE/MV Exchange Index.

FTSE Russell equity indices are used by investors across the world as equity benchmarks, allowing them to track the performance of specific market segments.

The country, according to the Central Bank of Nigeria (CBN), has a foreign exchange backlog amid CBN moves to unify the market and give room for foreign exchange circulation in the country.

The CBN has said that it is working with the commercial banks to clear the $10 billion foreign exchange backlog which analysts said is unrealistic. 

The acting Governor of the CBN, Folashodun Shonubi, had said the backlogs would be cleared through different structures within the foreign exchange market, adding that banks, which control 75 per cent of the foreign transactions, will play a significant role in seeing that the backlog is cleared.

The foreign exchange backlogs, which are the unmet demand for foreign exchange by investors and exporters, are estimated at $10 billion and have resulted in heavy losses to many firms.

These foreign exchange backlogs include dollar requests from manufacturers and importers purchasing raw material inputs from abroad, parents paying their children’s tuition fees abroad, Nigerians paying medical bills abroad, travellers sourcing Business Travel Allowances (BTAs) and Personal Travel Allowances (PTA), among others.

These requests were stalled for years due to dollar scarcity, a drop in foreign direct investments (FDIs) and Foreign Portfolio Investments (FPIs) inflows, drop in foreign reserves positions amongst other offshore investment opportunities.

What Analysts Said

The Chief Executive Officer, of Wyoming Capital and Partners, Mr. Tajudeen Olayinka stated that the downgrade of NGX from frontier status to unclassified market status by FTSE Russell was activated because of persistent liquidity challenges around the official foreign exchange market, which crippled the capacity of foreign portfolio investors to replicate benchmark changes. 

According to him, the difficulty in making investment decisions that are urgently required can be very devastating for foreign institutional investors, and that suggests persistent accumulation of losses in the opportunity space. 

He explained further, “This will obviously discourage foreign portfolio investors from participating in Nigeria’s stock market and possibly dampen chances of liquidity recovery in the foreign exchange market in the immediate to near term. 

“NGX All-Share Index (ASI) could experience a pushback in the coming days before subsequent recovery. I think government should continue to push hard on reforms, in a way to address numerous challenges in the economy. 

“There’s no doubt that the immediate past regime of President Muhammadu Buhari did so much damage to the economy.”

Speaking on the report, the Vice President, of Highcap Securities Limited, Mr. David Adnori said, “The decline in the stock market can be linked to FTSE Russell downgrade and other macroeconomy reports. For instance, the revenue target of the FG may not be realised because daily crude oil production is 1.6mpd whereas Nigeria is only producing up to 1.2mpd.

“I think the FTSE Russell report may be relevant to foreign investors who have been suffering from the inability to repatriate their dividends for several years.

“Capital market cannot be held for foreign exchange crisis because investors are paid in Naira. Since they brought the dollar into the stock market based on the agreement with CBN on capital importation, the responsibility was on CBN to facilitate the conversion of naira income to foreign currencies and remit abroad.

“CBN has failed in its responsibilities and as it is now, it is like foreign investors have transferred aggression to the capital market. The foreign exchange crisis does not have anything to do with domestic investors.”

The Managing Director, ARM Securities Limited, Mr. Rotimi Olubi explained that the stock market reacted to the news on Monday, leading to sell-offs in the stock market. 

He noted: “However, we do not expect that reaction to be the norm seeing that the market is presently dominated by the domestic players (about 94per cent as of July 2023).

“Although, we note the implication of undermining the government’s effort in attracting FPI flows into the economy, seeing that foreign fund managers won’t even see Nigeria constitute the frontier market index.”

The Managing director/ chief business officer, of Optimus by Afrinvest, Mr. Ayodeji Ebo expressed that the stock market was expecting a sell-off from foreign fund managers that have funds/ETFs tracking Nigeria.

He added that the report may delay the significant entrants of foreign portfolio investors in the Nigerian stock market.

Domestic and Foreign Investors Portfolio in the Stock Market

Since 2019, domestic investors comprised of institutional and retail investors dominated total transactions on the Exchange and over a 16-year period, domestic transactions decreased by 45.30per cent from N3.556trillion in 2007 to N1.945trillion in 2022 whilst foreign transactions also decreased by 38.47per cent from N616billion to N379billion over the same period.

Total domestic transactions accounted for about 84per cent of the total transactions carried out in 2022, while foreign transactions accounted for about 16per cent of the total transactions in the same period.

The stock market this year has maintained a positive trend amid domestic investors’ increasing participation with little contribution from foreign investors. 

NGX had revealed that domestic investors in seven months of 2023 dominated the stock market with 91.38 per cent of 2023 Year-till-Date (Ytd)  growth from 84.51 per cent in 2022 YtD.

On the contrary, foreign investors’ participation in the stock market dropped to 8.62 per cent 2023 YtD from 15.49 per cent 2022 YtD.

Attracting Foreign Portfolio Investment into Stock Market

However, Nigeria has been able to attract some appreciable FDIs over the years. To a greater extent, one of the Federal Government measures to motivate FDI is noticeable in the Ease of Doing Business Policy. The policy has been beneficial to SMEs largely and it has helped in driving the inflow of FDI into the country.

Attracting foreign investment can be simple if the locally listed or unlisted company does things the right way. 

However, the most important parts of attracting foreign investors are a strong business model, good business structure and culture, impressive infrastructure quality, huge market size, return on investment, and innovation. These are some of the factors that usually attract foreign investment to a local stock market.

Analysts believe that attracting foreign investment requires a clear and coordinated strategy that focuses on creating an attractive business environment, offering incentives, developing a skilled workforce, investing in infrastructure, and building strong international relationships.

Easy access to foreign exchange and government economy blueprint must be transparent for investors to know where to invest.