Nigeria's stock market took a dramatic plunge to start the week, erasing the gains of the prior week, as FTSE Russell, the global index provider, downgraded the Nigerian Exchange from "Frontline" to "Unclassified Market."
The downgrade means Nigeria's index status will be removed entirely from all five FTSE stock indices, effectively given a value of zero. This significant move is likely to have repercussions for Nigeria's visibility on the international investment landscape, making it more challenging for the country to attract foreign capital.
The reclassification, set to take effect on September 18, 2023, prompted immediate selloffs that drove the All-Share Index down by 1.24% to close at 67,296.18 points.
The downdraft was felt acutely in Nigeria's Tier-1 banking sector, with Zenith Bank plunging by 5.82%, Guaranty Trust Holding Co. (GTCO) dropping by 8.62%, and Access Bank falling by 8.57%.
This resulted in the market's year-to-date (YTD) returns tumbling to 31.11% and wiping out N463.66 billion ($1.14 billion USD) in market capitalisation, which closed at N36.83 trillion ($90.81 billion USD).
How foreign exchange woes prompt downgrade
In a statement released on Monday, September 11, FTSE Russell cited Nigeria's ongoing foreign exchange problems as a key motivator behind the downgrade.
According to the UK-based financial institution, these issues have hindered the ability of institutional investors to repatriate trapped capital.
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The statement also expressed skepticism about the effectiveness of Nigeria's recent foreign exchange reforms, including the adoption of a 'willing seller, willing buyer' policy at the Investor and Exporter (I&E) foreign exchange window.
Despite these changes--introduced last year--FTSE Russell noted little or no improvement in foreign exchange supply trends, a factor that continues to deter capital inflows from institutional investors.
Experts divided over move
Uchenna Uwaleke, Professor of Finance and Capital market in his reaction said: "It's an unfair assessment and too quick a decision especially coming after the new government had heeded the advice of Bretton Woods Institutions to float the naira"
He argued that they pushed us to float the naira when we were not ready, only to turn around and slam us when the promise of increased Fx inflows has yet to materialise.
However, Managing Director, Chief Economist, Analysts' Data Services and Resources (ADSR) Limited, Afolabi Olowookere said: "I don't subscribe to people saying they should have given us time. Why should they? That's their stock in trade and it is not the first or second time. It's there in the literature, that hot money will move to where it can get the highest return, not where it can develop the country.
"These people's money is good because they lubricate transactions, they make that market look attractive but you don't base your planning on them. You base your decisions on more fundamental issues.
