How MSCI exclusion of Nigeria will affect stock market, economy



The move by MSCI Inc., a leading provider of investment decision support tools worldwide, to review Nigeria’s continued inclusion in its Frontier Market Index due to tight foreign exchange liquidity in Nigeria did not just start now.

Available reports have it that on September 8, 2015, the organisation had said Nigeria would be phased out of its Emerging Market Government Bond Index (GBI-EM) by the end of October 2015 due to alleged lack of liquidity and transparency in the nation’s foreign exchange market.

This development followed an earlier decision by the firm in January 2015 to place Nigeria on a negative index watch on its Government Bond Market Index.

For those who have not known, JP Morgan Chase & Co. is an American multinational banking and financial services holding company. It is widely recognized as a global leader in capital raising, for wealthy nations and emerging markets.
Nigeria was included in the JP Morgan Emerging Market Government Bond Index (GBI-EM) in 2012, based on the existence of an active domestic market for FGN bonds.

The GBI-EM indices consist of regularly traded liquid fixed-rate domestic currency government bonds. Nigeria was expected to have a 0.59 per cent weight of the $170 billion of assets under management of the index.

At that time, Nigerian bonds were offering yields of up to 16 per cent compared to the GBI-EM Index yield of 5.8 per cent.
Following the organisation’s latest proposal to extend the exclusion to equities’ market, The Guardian sought the views of experts on the likely effects on Nigeria if this is done and what can be done to halt the execution of the threat.

An online publication stated that if Nigeria were removed from the JP Morgan Index, many foreign investors would be forced to sell off their Nigerian bond holdings, which is estimated to be worth about $2 billion.
“There are foreign portfolio investors who knew little about investing in Nigeria but decided to invest because it is listed on the JP Morgan’s index.

Delisting Nigeria, the publication stated, would mean that bond yields and borrowing costs would increase; and that would negatively affect Nigeria’s dire economy. The Naira may also face another round of major devaluation, as the economy could struggle to sustain the pace of forex outflows outside Nigeria.
“Nigeria may have to devalue its Naira again not because of JP Morgan but because that is the best option for them to remain on the JP Morgan’s index.

Corroborating the online publication, Mr. Tunde Oyekunle, Chief Executive Officer, Finawell Capital Limited, Lagos, said: “It is not a good development for our equities market, considering the fact that a large number of foreign fund investors have exited their position in the Nigerian stock market in the past few months.“Nigeria is becoming less popular among leading frontier funds and indices.

The obvious impact is that the percentage of foreign portfolio participation in our market, which has dropped from an average of about 65 per cent to 35 per cent, is likely to drop further. This is because if Nigeria is eventually excluded, more foreign investors would exit some of their stock position in the market. Although the effect may be insignificant due to the fact that local investors currently have higher participation than foreigners.

To avert the delisting, we need to formulate an effective exchange rate policy, significantly improve our balance of trade, political instability/security, and improve on our macro economic indices, GDP growth etc.

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