Nigeria's shift to a shorter market settlement cycle, aimed at speeding up stock market transactions, has hit a snag. FTSE Russell has halted the country's upgrade to frontier market status.
Earlier this year, Nigeria went from being unclassified to a frontier market, effective from September. On Tuesday, FTSE Russell announced, "FTSE Russell announces that the reclassification of Nigeria is under review."
Before this reclassification in March, Nigeria was out of the frontier markets for thirty months. This was due to a steep currency devaluation and other foreign exchange reforms.
FTSE Russell, based in London, is delaying the upgrade after Nigeria changed from a t+2 settlement cycle to a t+1 model this month. This change cuts the settlement time by one working day.
This policy shift is part of broader reforms in the equity market. It aims to speed up stock clearing times, which should increase activity and liquidity in the local market. It also promises faster settlement for local investors.
But there are worries that this new approach could scare off international investors. Under the new system, they must fund trades before the transactions happen.
"A requirement to prefund equity trades is deemed a negative for the Settlement Cycle (DvP) criterion, which is one of the five core FTSE Quality of Markets criteria required for attaining Frontier market status within the FTSE Equity Country Classification scheme," FTSE stated.
FTSE expects to announce its decision on the review by August.
About a year ago, it took three business days for settlement after a transaction. This was shortened to t+2, and now it’s down to one business day. This change puts pressure on investors to take on currency risks they usually try to avoid, according to an investment analyst who wished to remain anonymous.
"The level of confidence hasn’t risen enough for you to think that they can now start taking that level of currency risk directly. That may not be the only reason, but it may be a strong reason for the significant pullback that we saw in June," the analyst said.
The Risk Ahead
This situation could further hurt foreign investors' shaky confidence in Nigeria. The country is still working to regain the trust of overseas investors after a long dollar squeeze during COVID-19 lockdowns that trapped capital and forced many to leave.
Foreign investment in Nigerian stocks dropped 17.4 percent to ₦400.1 billion from January to May compared to the same period in 2022, according to Nigerian Exchange Limited data.
There are fears that Nigeria could revert to an unclassified market, which would hurt liquidity in equity trading.
"The idea of the FTSE and frontier index was that the inclusion meant we were expecting a good amount of foreign portfolio inflows. You know, anything between $100 million to $400 million going into the equity market," Arnold Dublin-Green, chief investment officer at FTSE Equity Country Classification, told PREMIUM TIMES.
"Outside of that, there are active investors who will want to beat the index, and that inflow could be another $400 million or so."
Nigeria risks losing those vital potential inflows if it cannot return to the index, Mr Dublin-Green added. Both analysts said FTSE Russell's decision to pause Nigeria's upgrade could likely have been avoided with better communication between capital authorities and foreign market players before the new settlement cycle was introduced.
MSCI, another global stock index provider based in New York, said last June it needed more time to assess Nigeria's status. It will likely consider this situation in its own review.
In 2024, MSCI removed Nigeria from its Frontier Markets Index after FTSE Russell made a similar decision the year before.
A downgrade to unclassified market status would reduce Nigeria's stock market visibility and make it less accessible to global investors.
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