Commodities, Currencies, Frontier Markets, Funds / ETFs, Stocks

More Troubles May Lie Ahead For Nigeria As MSCI Weighs Removal From Index

Nigerian Stock ExchangeMore troubles may lie ahead for Nigeria, Africa’s largest economy, as global equity index provider MSCI is considering dropping the nation from its benchmark Frontier Markets Index, which could put $500 million of equity investment under threat.

On Thursday MSCI announced that it’s considering removing the country from its Frontier Markets Index, blaming currency restrictions imposed by Nigeria’s Central Bank which has led to the “continuous deterioration of foreign-exchange market liquidity.”

Nigeria, Africa’s largest crude producer, an OPEC member state, is facing its worst crisis in decades amid a plunge in the price of oil which has battered its economy by slashing revenues and put the nation’s currency, the naira, under immense downward pressure as it fell to record lows, prompting the Central Bank to peg its currency and introduce curbs to protect foreign exchange reserves, which have fallen to an 11-year low.

Such restrictions on access to foreign currency have suffocated Nigerian businesses dependent on imports and have resulted in a forex crunch with a severe shortage of dollars in addition to encouraging capital flight.

Nigeria’s economy relies heavily on oil as it accounts for 70 percent of the government’s revenue and 95 percent of the its export revenue, Stratfor Global Intelligence estimates.

The impact can be seen as Nigeria’s growth slowed to 2.8 percent in 2015, which was the slowest pace since 1999, and growth is estimated to further slow to 2.3 percent in 2016. That is compared to 6.3 percent growth in 2014. Industrial output contracted by 2.2 percent last year, compared with an expansion of 6.8 percent in 2014.

Morgan Stanley and Capital Economics both see Nigeria’s growth decelerating to 2 percent this year.

In 2015, Nigeria’s exports tumbled by about 40 percent and the general government deficit doubled to about 3.3 percent of GDP, according to the IMF.

On the potential removal of Nigeria from MSCI’s Frontier Market Index, the company said:

Ease of capital inflows and outflows is one of the key criteria in the MSCI 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.

MSCI’s decision to drop Nigeria from its Frontier Markets Index threatens around $500 million in stock investments, according to Renaissance Capital.

Investors following the index have approximately $500 million staked in Nigeria, half of what they would have if they were accurately tracking the benchmark index, and these holdings are “under threat” should MSCI exclude Nigeria from the index, according to Charles Robertson, Chief Economist at Renaissance Capital.

The risk of Nigeria actually being evicted from the index is now “acute”, according to Robertson, who estimates that large sums of investment could potentially head for the exit.

The latest data tells us that the asset-weighted aggregate MSCI Frontier Markets benchmarked fund is currently underweight Nigeria; if they were to sell their entire remaining holdings in Nigeria, this would account for $410m of foreign equity selling. Global frontier equity ETFs are still tiny, with just $570mn of passive money benchmarked to MSCI, of which only $70mn is in Nigeria.

An exclusion from the index has implications spanning out from the financial markets, according to Robertson.

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.

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.

With this news, Nigeria’s hopes of attracting private sector investors have been dealt another blow.

So who would benefit if MSCI expels Nigeria from the index? Argentina, Pakistan, Morocco, and Kenya, according to Robertson, as they would account for over 40 percent of frontier index and attract investment inflows.

Nigeria’s capital controls have already led to the country being removed from JP Morgan and Barclays local-currency emerging market bond indexes, which are tracked by hundreds of billions of dollars in investment.

Repeated calls have been made for Nigeria to devalue its currency, however its Central Bank Governor and President have resisted such notions.

The naira fell 24 percent against the dollar in the four months between October 2014 and February 2015, before currency controls finally arrested the decline.

Naira in Chokehold

Chart courtesy of Bloomberg

Nigeria’s local-currency bonds are the worst performing among 31 emerging markets tracked by Bloomberg and is the only emerging market bond to have generated a loss in 2016.

Foreign investment inflows tumbled by 32 percent in 2015, the Nigerian Stock Exchange said in a report on it’s website on Dec. 19, as unpopular currency controls have knocked investor confidence.

The Nigerian Stock Exchange All Share Index has fallen around 12 percent this year, versus around a 2.8 percent fall in the benchmark frontier market gauge, and has seen its market capitalization halve in dollar terms since the end of 2013 to its current level of $44.3 billion, which is barely a 10th of the size of Singapore’s level and half the size of Colombia’s, according to Bloomberg.

Africa's Dollar Based Stock Market Capitalization - Bloomberg

Chart courtesy of Bloomberg

The U.S. traded Nigeria exchange traded fund (ETF), The Global X MSCI Nigeria ETF (NGE), has plunged over 60 percent since July 2014 and is down over 15 percent so far this year.


The Global X MSCI Nigeria ETF (NGE). Chart courtesy of

As investors continue to bail from Nigeria, its stock trading turnover has dropped to $672 million in the first quarter, the lowest since at least 2009, when Bloomberg first began compiling data.

Trading volumes may continue to fall as foreign investors shun Nigeria’s market while awaiting a devaluation of the currency and as economic growth slows to the lowest in decades, according to Robert Omotunde, an analyst at Lagos-based broker Afrinvest West Africa Ltd.

Nigeria Stock Trading Slump

Chart courtesy of Bloomberg

“A lot of foreign investors are cautious because of the foreign-exchange risk that’s just waiting to crystallize,” Omotunde said on Thursday. “And some listed companies are barely keeping afloat.”

Markets are betting that Nigeria will be forced to follow in the footsteps of fellow peer oil exporters like Russia, Kazakhstan, and Mexico, whom were forced to let their currencies weaken amid the plunge in the price of oil. While the naira has been pegged by Nigeria’s Central Bank at 197-199 per dollar since March 2015, forward prices suggest that it will drop 29 percent to 280 in a year.

On the black market, however, the naira’s rate has weakened to 320, after nearly reaching 400 earlier in the year.

Nigerian Naira Value Collapses

Chart Courtesy of Bloomberg

Aberdeen Asset Management and Duet Asset Management have said that the naira needs to fall by at least 20 percent for foreign investors to return to the African nation.

“If you get, say, a 20 percent devaluation you will get some investors coming back,” Kevin Daly, a money manager at Aberdeen Asset Management told Bloomberg earlier in January. “If it is less than that, I don’t think you will get huge amount of inflows. If the market thinks it’s credible adjustment, you will get inflows.”

A London money manager said that despite the low valuation of Nigerian stocks, many investors are staying away from Nigeria, as it doesn’t make sense to invest in the nation due to the risk of a 20 to 25 percent currency devaluation.

For money to flow back in, authorities need to let the currency depreciate by about 20 percent and end the foreign-exchange trading restrictions, said Ayodele Salami, Chief Investment Officer of London-based Duet Asset Management, who oversees about $500 million of African equities. “The Nigerian equity market is ridiculously cheap, but you’d look pretty stupid to buy it and then take a 20 or 25 percent writedown just because of a devaluation. A lot of people will wait on the sidelines.”

In February the IMF urged Nigeria’s Central Bank to devalue its local currency and remove curbs on access to foreign exchange as part of a package of aggressive economic policies in order to counter the impact of low oil prices.

In march, Unilever said Nigerian authorities would be “very insane” to continue with currency policies that have led to a record difference between the naira’s official and black-market rates.

“It would be very insane to continue like this for months and months,” Unilever’s Africa President Bruno Witvoet told Bloomberg. Clarity on what the “right rate” is would help businesses “make more sensible decisions,” he said.

As capital restrictions remain in place in Nigeria, economic growth data from the fourth quarter of last year confirmed what the Central Bank has been loath to admit: currency controls are hurting the economy.

Gross domestic product in Nigeria rose 2.1 percent in the fourth quarter of 2015 from a year earlier, according to data released in March, down from 2.8 percent in the previous three months and lower than the 2.9 percent median estimate of 11 economists surveyed by Bloomberg.

Nigeria's Growth Plunges

Chart courtesy of Bloomberg

The figures “confirm widespread fears of a slowdown, possibly even a recession,” Alan Cameron, an economist at Exotix Partners told Bloomberg. “The lack of investment and access to imported inputs has hamstrung the corporate sector, and is increasingly being felt by the man on the street.”

Nigeria has the third-largest weighting in the MSCI Frontier Markets Index after Kuwait and Argentina. Nigerian Breweries Plc, Nestle Nigeria Plc and Guaranty Trust Bank Plc are among the 15 stocks included from the country.

MSCI said that it will make a decision on Nigeria by April 29.


One thought on “More Troubles May Lie Ahead For Nigeria As MSCI Weighs Removal From Index

  1. Well done on this fantastic piece by EMerging Equity Chief Editor. On my end I would like to add two things. Very true that oil prices have affected the state of the Nigerian economy but also let’s look at the index providers. They are like the big three rating agencies providing countries with more bad news as they simply act like the weapons of mass economic destruction. Downgrade = Capital Outflows = More Bad News for the economy!

    Liked by 1 person

    Posted by ETFalpha | April 9, 2016, 7:58 am

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