The Financial Times Stock Exchange (FTSE) has reclassified Nigeria from frontier market status to unclassified market status.
FTSE Russell, a subsidiary of the London Stock Exchange Group, classifies countries based on different criteria, including the size and liquidity of the stock market, the stability of the country’s political and economic environment, and the accessibility of the market to foreign investors.
According to FTSE, Nigeria’s forex crisis is the primary reason for the rating downgrade. In its notice, it said: “Further to the ‘FTSE Equity Country Classification – Watch List Status of Nigeria’ announcement published on the 30th June 2023, FTSE Russell has received feedback from market participants that although Nigeria has adopted a floating foreign exchange (FX) rate for the Nigerian Naira in the Investors’ & Exporters’ (I&E) FX Window, which is now operating on a “Willing Buyer, Willing Seller” basis, the lack of liquidity in the I&E FX Window continues to adversely impact the ability of international institutions to replicate benchmark changes.”
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Since Nigeria floated its exchange rate, it has not achieved its goal of a unified exchange rate. As of report time, there was a 25 per cent margin between the official and parallel dollar exchange rates. The naira also fell to a record low of N950/$ at the unofficial market in August.
Nigeria depends heavily on crude oil exports to earn foreign exchange. But its oil production has been on a downtrend over the last five years. Also, foreign reserves have been shrinking. As a result, forex liquidity has been insufficient to cater to local needs. It currently has $10 billion in forex backlogs that need urgent attention.
Why does this matter? Because of investor sentiments. Nigeria is in dire need of foreign investments, and these kinds of reports can spook them. Many businesses lost money because of the country’s new forex policy, and some shut down altogether. Investors need to see that they won’t lose whatever profits they gain to volatile exchange rates.
Notably, the Central Bank of Nigeria has been trying different approaches to hold the naira steady. It gained momentum in August when it announced a $3 billion loan to boost liquidity. But that plan fell through as most investors became reluctant, leaving only AFREXIM bank, which could not provide that much money on its own.
The stock market, so far, has also had a stellar year as it reached a 15-year-high. Despite the economic headwinds, the Nigerian Exchange is Africa’s second-best-performing exchange in the last three months, behind only Ghana. However, local investors take most of the credit for this feat. And while reports like the FTSE’s don’t spell automatic doom for the stock market, it’s often a warning call for investors.
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However, there’s a chance that this rating will improve in the coming days. FTSE said it will continue to monitor Nigeria’s market. If it can clear its backlogs, the ratings will improve. But until then, we wait.