Nigeria’s Stock Market Faces Setback Amid New Settlement Cycle
Nigeria has recently adopted shorter market settlement cycles to accelerate the clearing process of stock market trades. However, this effort encountered an early hurdle when FTSE Russell announced the suspension of Nigeria’s elevation to frontier market status.
The London-based index provider disclosed on Tuesday that Nigeria’s re-rating is under review, following its upgrade from unclassified to frontier market status earlier this year, scheduled to take effect in September.
Historical Context of Nigeria’s Market Classification
After a significant devaluation of its currency and subsequent foreign exchange reforms, Nigeria was reclassified to frontier market status in March, marking a 30-month exclusion from this category. This classification is crucial for attracting foreign investment, enhancing the market’s visibility and access.
FTSE Russell has placed the upgrade on hold as Nigeria transitioned from a t+2 settlement cycle to a t+1 model this month, effectively reducing settlement times by one business day.
Reforms Aimed at Boosting Domestic Investor Activity
This policy shift is part of a broader range of reforms aimed at improving the efficiency of the stock market by expediting share liquidation. Faster settlement times are expected to boost domestic investor participation and enhance overall market liquidity.
However, there are increasing concerns that the new arrangements may deter international investors. Under the revised system, these investors are required to pre-fund transactions before execution, a shift that raises eyebrows in the investment community.
Concerns Over International Investor Sentiment
FTSE Russell has noted that the pre-funding requirement negatively impacts the delivery versus payment (DvP) standard, which is one of five core FTSE criteria necessary for achieving frontier market status. The organization aims to communicate its findings on this review by August.
Approximately a year ago, transactions took three business days to settle, a period that has since been reduced to t+2. With the new t+1 structure, international investors may face increased exposure to currency risks, which they typically seek to avoid. An investment analyst, who preferred anonymity, indicated that the current confidence levels do not reflect a willingness among foreign investors to assume such risks.
Potential Implications for Foreign Investment
This policy adjustment could further undermine the precarious confidence of foreign investors in Nigeria’s market. The backdrop of a prolonged dollar shortage during the pandemic had already caused many investors to exit the country, a trend that is now compounded by uncertainties surrounding the new settlement cycle.
According to data from the Nigerian Exchange Limited, foreign capital inflows into Nigerian equities plummeted by 17.4%, totaling £400.1 billion in the year leading up to May compared to the previous year, intensifying concerns about the future of Nigeria’s market classification.
Market Accessibility and Future Prospects
Experts argued that the inclusion of Nigeria in the FTSE Frontier Index was anticipated to attract foreign investment ranging from $100 million to $400 million into the stock market. Arnold Dublin-Green, chief investment officer of the FTSE Equity Country Classification Scheme, stressed that the failure to regain index status could have dire consequences for potential inflows.
Both analysts believe that better communication between capital authorities and foreign market participants could have mitigated FTSE Russell’s decision to suspend Nigeria’s upgrade. Meanwhile, MSCI, another prominent stock index provider, stated last June that it requires additional time to assess Nigeria’s position while monitoring developments closely.
MSCI had previously removed Nigeria from its frontier market index in 2024, following a similar action by FTSE Russell the prior year. A downgrade to unclassified market status significantly diminishes a country’s international stock market profile, effectively making it less attractive and accessible to global investors.
