Morgan Stanley Downgrades Nigeria’s Market Rating As Investors Panic Over Foreign Exchange Crisis

Morgan Stanley Capital International (MSCI) Inc, a leading provider of critical decision support tools and services for the global investment community has downgraded Nigeria’s market rating.

Morgan Stanley reclassified the country’s rating from Frontier Markets to Standalone Market Status.

The MSCI Frontier Markets Index captures large and mid-cap representation across 29 Frontier Markets (FM) countries. The index includes 199 constituents, covering about 85% of the free float-adjusted market capitalization in each country.

The Standalone Market Status is for newly eligible markets; markets previously not covered by MSCI or markets that were closed to a specific group(s) of investors.

“A reclassification to a Standalone status may occur in the case of severe deterioration in market accessibility or size and liquidity,” Morgan Stanley said on its website.

By implication, each Nigerian security will be deleted from the MSCI Frontier Markets Indexes at a price that is effectively zero. Also, Nigeria has joined countries like Zimbabwe, Botswana, Palestine among others in the same category.

In June, Morgan had said it would continue to consult with market participants on the potential reclassification of the MSCI Nigeria Indexes until September 29, 2023, and will announce the results of the consultation on or before October 31, 2023.

It hinged its decision on foreign exchange liquidity issues which it said have continued to impact the accessibility of the Nigerian equity market.

It said, “Since the onset of these issues in March 2020, there have been constraints in US dollar liquidity in the market, leading to constant capital repatriation concerns and a gap between the parallel and official exchange rates for the Nigerian Naira.

“This has persistently caused index replicability and investability issues for international institutional investors. The feedback from market participants obtained as part of the consultation suggests that the limited accessibility of the Nigerian equity market, resulting from lack of liquidity on the FX market, would warrant its removal from the MSCI Frontier Markets Index.”

The Central Bank of Nigeria on June 14, 2023, introduced operational changes to the FX Market which were effectively abolishing multiple exchange windows and reinstalling the “Willing Buyer, Willing Seller” model.

When the decision was made, Jean-Maurice Ladure, Global Head of Index Management Research and a member of the MSCI Index Policy Committee said Morgan Stanley would allow more time for the liquidity situation in the Nigerian FX market to stabilize.

As of the time of the decision, Nigeria was owing around $7bn in FX forwards and other foreign currency obligations.

However, THE WHISTLER reported that the apex bank has begun settling FX Forward obligations owed Nigerian banks.