The decision by MSCI Incorporated to consider dropping Nigeria from its Frontier Markets Index has put $500 million of stock investments in Africa’s biggest economy under threat, according to Renaissance Capital Limited.
The development comes amid a crumbling economy, which is struggling to survive forex, energy, and most recently, inflation challenges.
Investors following the index have $500 million staked in Nigeria, half what they would have if they were properly tracking the benchmark, and those holdings are “under threat” should MSCI exclude Nigeria, according to Charles Robertson, chief economist at Renaissance, a Moscow-based investment bank focused on developing markets.
“The risk has become acute,” Robertson said in an e-mailed note. “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.”
MSCI is reviewing Nigeria’s position because of foreign-exchange controls imposed by the central bank that have led to the “continuous deterioration of foeign-exchange market liquidity,” the company said in a statement on Thursday.
The company’s decision is expected to be formalised by April 29.
Nigeria’s central bank currency-trading restrictions, which President Muhammadu Buhari backs, are reported to have caused the country to be excluded from JPMorgan Chase & Co. and Barclays Plc local-currency emerging market bond indexes, tracked by hundreds of billions of dollars of funds.
In the last quarter of 2015, JPMorgan Chase & Co. excluded Nigeria from its local-currency emerging-market bond indexes tracked by more than $200 billion of funds, after restrictions on foreign-exchange transactions prompted investor concerns about a shortage of liquidity.
At the end of trading last Friday, the Nigerian Stock Exchange All Share Index fell 0.1 to 25,328.07, a 0.16 percent drop, which further extends losses this year to 12 percent, taking the market capitalisation to $44.2 billion.
As noted in earlier reports by BusinessDay, falls in the stock market have been broad based, spilling into large, midcap and small cap stocks. Banks, which make up about 30 percent of the index, have been hard hit as investors dump financials on fears of spiralling bad loans.
