FTSE Russel: FX challenges influence on equities fundamentals, FDI
Recently, FTSE Russel in a report downgrade Nigeria from frontier status to unclassified market status. MOTOLANI OSENI, examines the report implication on the stock market and what is required by stakeholders in addressing the foreign exchange crisis the domestic economy currently facing. Excerpts:
FTSE Russel in its latest report downgraded from frontier status market to unclassified market status over the foreign exchange crisis Nigeria economy.
FTSE Russell, the subsidiary of London Stock Exchange Group (LSEG) downgrade is on the backdrop of Nigeria’s foreign exchange (FX) challenges which is a new source of negative sentiment that is capable of triggering stock sell off at the Exchange.
When the report hits the stock market on Monday, September 11, 2023 investors negative sentiment rock listed fundamental stocks as the overall market capitalisation dropped by N757billion.
The stock market had closed September 8, 2023 at N37.295 trillion, dropped by 2.07per cent or N757 billion to close at N36.538 trillion on Tuesday, September 12, 2023.
The federal government led by President Bola Tinubu through the Central Bank of Nigeria (CBN) had unify the foreign exchange and its implication depreciated the Naira at the Investors & Exporters Foreign Exchange (I & E FX) market, and parallel market.
The report by FSTE Russel is a reflection of foreign exchange crisis as foreign investors are struggling to repatriate their earnings.
The downgrade takes effect from September 18 , 2023 when Nigerian index constituents will be deleted at zero value from FTSE Frontier Index Series, including the FTSE Frontier 50 Index, FTSE IdealRatings Islamic Index Series, FTSE/JSE All Africa Index Series, FTSE Middle East & Africa Extended Index Series and FTSE/MV Exchange Index.
FTSE Russell equity indices are used by investors across the world as equity benchmarks, allowing them to track the performance of specific market segments.
The country, according to CBN has foreign exchange backlog amid CBN moves to unify the market and give room for foreign exchange circulation in the country.
The Central Bank had said that it is working with the commercial banks to clear the $10 billion foreign exchange backlog in what analysts said it is unrealistic.
The apex bank, noted that the backlogs would be cleared through different structures within the foreign exchange market, adding that banks, which control 75per cent of the foreign transactions, will play a significant role in seeing that the backlog is cleared.
The foreign exchange backlogs, which is the unmet demand for foreign exchange by investors and exporters, are estimated at $10 billion and have resulted in heavy losses to many firms.
These foreign exchange backlogs include dollar requests from manufacturers and importers purchasing raw material inputs from abroad, parents paying their children’s tuition fees abroad, Nigerians paying medical bills abroad, travellers sourcing Business Travel Allowances (BTAs) and Personal Travel Allowances (PTA), among others.
These requests were stalled for years due to dollar scarcity, a drop in foreign direct investments (FDIs) and Foreign Portfolio Investments (FPIs) inflows, drop in foreign reserves positions amongst other offshore investment opportunities.
It was a positive news in the stock market when the CBN in June 2023 announced unification of all segments of the forex exchange market.
In a circular, the apex bank said all foreign exchange windows are now collapsed into the investors & exporters (I&E) window.
The changes to operations in Nigeria’s foreign exchange market implies that the country has eased its control of the naira, allowing the local currency to freely float.
A free-floating exchange rate occurs when a government allows the exchange rate to be determined purely by market forces and there is no attempt to ask the central bank to influence the external value of the exchange rate.
However, the report by FTSE Russell is a reflection of lingering foreign exchange challenges and foreign investors are always quick to react despite their little contribution to the stock market. Domestic over the years have dominated the stock market and the impact of the report tends not to influence stock market fundamentals.
Domestic and foreign investors portfolio in the stock market
Since 2019, domestic investors that comprises of institutional and retail investors dominated total transactions on the Exchange and over a 16-year period, domestic transactions decreased by 45.30per cent from N3.556trillion in 2007 to N1.945trillion in 2022 whilst foreign transactions also decreased by 38.47per cent from N616billion to N379billion over the same period.
Total domestic transactions accounted for about 84per cent of the total transactions carried out in 2022, whilst foreign transactions accounted for about 16per cent of the total transactions in the same period.
The stock market this year has maintained positive trend amid domestic investors increasing participation with little contribution from foreign investors.
NGX had revealed that domestic investors in seven months of 2023 dominated the stock market with 91.38 per cent 2023 Year-till-Date (Ytd) growth from 84.51 per cent 2022 YtD.
On the contrary, foreign investors’ participation in stock market dropped to 8.62 per cent 2023 YtD from 15.49 per cent 2022 YtD.
Attracting Foreign Portfolio Investment into stock market
In the Nigerian context, a foreign direct investor is an individual or entity resident abroad that has acquired, either directly or indirectly, at least 10per cent of the voting power of an enterprise resident in Nigeria.
FDI, is an investment from a party abroad into a business or enterprise in Nigeria to establish a lasting interest.
However, Nigeria has been able to attract some appreciable FDIs over the years. To a greater extent, one of the Federal Government measures to motivate FDI is noticeable in the Ease of Doing Business Policy. The policy has been beneficial to SMEs largely and it has helped in driving the inflow of FDIs into the country.
Attracting foreign investment can be simple if the local listed or unlisted company does things the right way.
However, the most important parts of attracting foreign investors are a strong business model, good business structure and culture, impressive infrastructure quality, huge market size, return on investment, and innovation. These are some of the factors that usually attract foreign investment to a local stock market.
In conclusion, attracting foreign investment requires a clear and coordinated strategy that focuses on creating an attractive business environment, offering incentives, developing a skilled workforce, investing in infrastructure, and building strong international relationships.
Ease access to foreign exchange and government economy blueprint must be transparent for investors to know where to invest.
Meanwhile, capital market analysts have expressed that the FTSE Russel downgrade is based on foreign exchange challenges in Nigeria, stressing that the stock market expected to rebound as it is dominated by domestic investors.
The Chief Executive Officer, Wyoming Capital and Partners, Mr. Tajudeen Olayinka stated that the downgrade of NGX from frontier status to unclassified market status by FTSE Russell was activated because of persistent liquidity challenge around the official foreign exchange market, which crippled the capacity of foreign portfolio investors to replicate benchmark changes.
According to him, the difficulty to take investment decisions that are urgently required can be very devastating for foreign institutional investors, and that suggests persistent accumulation of losses in the opportunity space.
He explained further that, “This will obviously discourage foreign portfolio investors from participating in Nigeria’s stock market and possible dampening of chances of liquidity recovery in the foreign exchange market in the immediate to near term.
“NGX All-Share Index (ASI) could experience a push back in the coming days before subsequent recovery. I think government should continue to push hard on reforms, in a way to address numerous challenges in the economy.
“There’s no doubt that immediate past regime of President Muhammadu Buhari did so much damage to the economy.”
Speaking on the report, the Vice President, Highcap Securities Limited, Mr. David Adnori attributed the decline in stock market performance to possible downgrade by FTSE Russell, stressing that foreign investors since the report was released have shown negative sentiments.
According to him, “The decline in the stock market can be linked to FTSE Russell downgrade and other macroeconomy reports. For instance, the revenue target of the FG may not be realised because daily crude oil production is 1.6mpd whereas Nigeria is only producing up to 1.2mpd.
“I think the FTSE Russell report maybe relevant to foreign investors who have been suffering from the inability to repatriate their dividend for several years.
“Capital market cannot be held for foreign exchange crisis because investors are paid in Naira. Since they brought dollar into the stock market based on the agreement with CBN on capital importation, then the responsibility was on CBN to facilitate the conversion of naira income to foreign currencies and remit abroad.
“CBN has failed on its responsibilities and as it is now, it is like foreign investors’ have transferred aggression to the capital market. The foreign exchange crisis does not have anything to do with domestic investors.”
The Managing Director, ARM Securities Limited, Mr. Rotimi Olubi explained that the stock market reacted to the news on Monday, leading to sell-offs in the stock market.
He noted that “However, we do not expect that reaction to be the norm seeing that the market is presently dominated by the domestic players (about 94per cent as of July 2023).
READ ALSO: Akpabio, Kalu lead Senators to Villa, brief Tinubu on…
“Although, we note the implication of undermining the government’s effort in attracting FPI flows into the economy, seeing that foreign fund managers won’t even see Nigeria constitute the frontier market index.”
The Managing director/ chief business officer, Optimus by Afrinvest, Mr. Ayodeji Ebo exressped that the stock market was expecting sell off from foreign fund managers that have funds/ETFs tracking Nigeria.
He added that the report may delay the significant entrants of foreign portfolio investors in the Nigerian stock market.
For more news update follow us on www.dailytimesng.com
