Nigeria Tries To Deal With Slumping Oil, But ETF Risks Remain

The Global X MSCI Nigeria ETF (Global X Funds NGE) has lost nearly a third of its value over the past year thanks in large part to the country's status as Africa's largest oil producer and a member of the Organization of Petroleum Exporting Countries (OPEC).

Nigeria As An Oil Exporting Economy

Nigerian policymakers are taking steps to reduce the government's dependence on oil revenue, but some analysts see those efforts as potentially ineffective, leading to even more downside for Nigerian equities. The government there depends on oil for about two-thirds of receipts, one of the highest percentages in the world.

“The Nigerian authorities' recent economic policy announcements show the response to the oil price shock is coalescing around state-led development to boost economic growth and import substitution to blunt the effects of declining oil receipts, Fitch Ratings says. It is yet to be seen whether the associated measures will promote growth while containing fiscal pressures, but we believe there are a number of downside risks,” said Fitch Ratings.

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Other ETFs Feeling Pressure From Nigeria

Slumping oil prices and faltering Nigerian stocks are pressuring other ETFs besides NGE. For example, the iShares MSCI Frontier 100 ETF FM devotes 12.2 percent of its weight to Nigeria, making the country that ETF's third-largest geographic allocation. FM is off nearly 21 percent over the past year. In addition to Nigeria, FM has a 23.6 percent weight to Kuwait, another OPEC member.

Nigeria, like the other single-country ETFs tracking OPEC nations, is not heavily exposed to the energy sector because most of the major oil companies in those countries are state-controlled. NGE's energy weight was just 7.3 percent at the end of the third quarter, according to Global X data. But, like the other single-country OPEC ETFs, NGE is heavily exposed to the financial services sector. That group is 44.3 percent of the ETF's weight.

“The government has indicated that it will use low energy prices to begin phasing out fuel subsidies in 2016, which would partly contain the deterioration in the public finances,” added Fitch. “Unorthodox or unpredictable FX policy makes raising external financing more difficult, deterring both private investors and possibly multilaterals. The persistent spread between the retail and official interbank exchange rate indicates unmet demand for dollars in the Nigerian economy.”