Some capital market stakeholders have stated that Foreign Portfolio Investments in Nigeria’s equity market will further reduce following the downgrade of the country by rating agency, FTSE.
FTSE in its latest advisory on the country downgraded Nigeria from Frontier market status to unclassified market status over the inability of investors to repatriate capital.
Nigeria had been added to the Watch List for possible reclassification from Frontier to Unclassified market status in September 2022.
In its latest update on Nigeria’s ranking, FTSE said it has “received feedback from market participants that although Nigeria has adopted a floating foreign exchange rate for the Nigerian Naira in the Investors’ & Exporters’ 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 institutional to replicate benchmark changes.
“Consequently, as index changes for Nigeria within FTSE Russell equity indices have been suspended since September 2022 and with no improvement in the ability of international institutional investors to repatriate capital at a foreign exchange rate that would be used in FTSE Russell equity indices, following ratification by the FTSE Russell Index Governance Board, FTSE Russell announces that the FTSE Equity Country Classification status of Nigeria will be downgraded from Frontier to Unclassified market status.”
Based on data from the National Bureau of Statistics, Foreign Direct Investment inflow into Nigeria fell by 33 per cent in 2022 to $468.91 million, the lowest in nine years and on the Nigerian Exchange Limited, foreign inflow dwindled to N 9.45bn in July 2023, a sharp decline from N22.72bn recorded in June.
However, the total foreign transactions decreased marginally by 11.37 per cent from N45.74bn (about $60.49m) to N40.54bn (about $52.58m) between June and July 2023.
Reacting to the downgrade, an equity research analyst, Olaide Baanu, lamented that it will have a significant impact on the equity market as foreign investors maintain their wait-and-see approach or even sell off more of their stakes.
He said, “The recent downgrade will have a significant impact on the Nigerian equity market, as many foreign portfolio investors will further tend to sell down their investments.”
Baanu added that the “illiquidity in the foreign exchange market is a serious issue that affects not only the equity market but also the entire financial market. As a result of difficulties in FX repatriation, many Nigerian stocks remain undervalued, and foreign investors have abstained from the market.”
For the Chief Executive Officer of Calyx Securities, Gbolahan Bello, the downgrade provides mixed blessings even as it will impact the equity market.
Bello said, “We should expect major retracement in equity market indices following this announcement by FTSE.”
However, “the temporary price reversal will present bargain hunting opportunities for savvy domestic investors as most of our listed stocks remain fundamentally sound, he concluded.
For economic and capital market analyst, Rotimi Fakayejo, the downgrade may just be ignored by the relevant authorities. “It will rather be ignored,” he stated.
The Nigerian Exchange Limited market capitalisation shed N757bn after Monday and Tuesday’s trading sessions following the FTSE downgrade.
Meanwhile, the Central Bank of Nigeria has directed banks to stop using their foreign exchange revaluation gains for dividends and other operational expenditures.
In a circular issued on Monday, the apex bank said the move was to battle the forex crunch that has persisted in the country, worsened by the harmonisation of the segments of the forex market in June.
“Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividends or meet operating expenses,” the CBN stated.