Nigeria’s capital market has been classified among the most prominent capital markets in Africa and in the emerging world. It has always been classified as a frontier market. However, a major London-based global equity provider known as FTSE Russell, which is a subsidiary of the London Stock Exchange Group, has downgraded Nigeria from a frontier market to an unclassified market. The downgrade is set to take effect on September 18, 2023.
FTSE Russell classifies markets into three categories: developed, emerging, and frontier. Frontier markets are those that are considered to have some investment risk but also offer the potential for high returns. Nigeria was first classified as a frontier market in 2011.
Nigerian indices will no longer be represented in the FTSE Frontier Index Series, which includes benchmarks such as the FTSE Frontier 50 Index, the FTSE/JSE All Africa Index Series, and the FTSE Middle East and Africa Extended Index Series, according to African Business.
These indices are used by traders and investors around the world to help them track the performance of different markets. Financial products such as index funds and exchange-traded funds (ETF) also track FTSE Russell benchmarks and therefore buy and sell stocks when they are added or removed from the indices.
The downgrade of Nigeria is due to the country's inability to meet the requirements for a frontier market. Specifically, FTSE Russell cited Nigeria's lack of a transparent foreign exchange regime and its inability to allow investors to repatriate capital freely.
The inability to repatriate capital freely refers to the fact that investors in Nigeria have faced difficulties in converting their naira earnings into foreign currency. This has made it difficult for them to exit the market or to invest their profits in other countries.
The foreign exchange regime in Nigeria is characterized by a dual exchange rate system, with one rate for official transactions and a higher rate for the parallel market. This has made it difficult for businesses and investors to get the foreign exchange they need at a fair price.
The downgrade is a setback for Nigeria's economy and its stock market. It will make it more difficult for Nigerian companies to raise capital from international investors. It could also lead to a decline in the value of the Nigerian stock market.
The Nigerian government has said that it is working to address the issues that led to the downgrade. However, it is unclear how long it will take for Nigeria to be reclassified as a frontier market.
Becoming an “unclassified market” is seriously problematic for Nigeria’s capital markets because it will lead to a massive divestment from investors. This begs the question of how Nigeria could become again a frontier market.
It is important for Nigerian capital markets to reform its foreign exchange regime. Indeed, the Nigerian government needs to create a more transparent and market-based foreign exchange regime. This would make it easier for businesses and investors to get the foreign exchange they need at a fair price. Moreover, it is important for the Nigerian government to implement laws that would make it easier for investors to repatriate capital. This means that the Nigerian government needs to make it easier for investors to convert their naira earnings into foreign currency. This would allow them to exit the market or to invest their profits in other countries.
In the meantime, the downgrade is likely to have a negative impact on the Nigerian stock market. Investors may become more cautious about investing in Nigeria, and the value of the stock market may decline. This could have a knock-on effect on the economy, as businesses may find it more difficult to raise capital and invest.