Problems Aplenty For The Nigeria ETF

Things are going from bad to worse for the Global X MSCI Nigeria ETF (Global X Funds NGE). Already a laggard performer among single-country emerging and frontier markets exchange-traded funds this year, the lone ETF dedicated to stocks in Africa's largest economy is enduring more punishment.

After falling nearly 2 percent last Friday, NGE resides perilously close to new lows and is down more than 36 percent year-to-date. That, even as oil prices have rebounded, indicating there are deeper problems for Nigeria's economy and equity markets, even though the country is a member of the Organization of Petroleum Exporting Countries (OPEC).

Economic Concerns

Rising inflation and foreign currency woes are plaguing the Nigerian economy. Nigeria's central bank is actively trying to solve those problems. Last month, the central bank there boosted interest rates by 200 basis points to a Brazil-esque 14 percent, marking the second rate hike this year.

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However, rising rates are not alleviating concerns about Nigeria's banks, a potential problem for the already imperiled NGE because the ETF devoted more than 45 percent of its weight to financial services stocks at the end of the second quarter.

Ratings Agency's Take

“Rising rates are likely to put additional pressure on banks' asset quality. Almost all lending is extended at floating rates and banks should be able to reprice their loans quite quickly but borrowers will face more difficulties in servicing their debts. Impaired loans are already high in the Nigerian banking sector, where average non-performing loan ratios reached 6.2 percent at end-March 2016, partly reflecting the impact of currency depreciation on businesses as well as higher oil-related problem loans at some banks,” said Fitch Ratings in a recent note.

NGE's woes are even more alarming when measuring the ETF against the broader frontier markets space. For example, the iShares MSCI Frontier 100 ETF FM, an ETF in which Nigeria is the fourth-largest country weight at almost 8.1 percent, is up nearly 3 percent year-to-date.

“The rate increase will also lead to higher funding costs for the banks. This and the switch away from loans and into fixed-income government bonds are likely to squeeze Nigerian bank net interest margins. We also expect operating costs and loan impairment charges to rise but still expect Nigerian banks to remain profitable in 2016,” added Fitch.

The ratings agency has a junk rating of “B+” on Nigerian sovereign debt.

Full ratings data available on Benzinga Pro.