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JP Morgan Fuels Optimism for Nigerian Bond Market

By on September 21, 2012

JP Morgan, New York

Nigeria’s bond market is taking off as the world’s biggest underwriter of emerging-market debt adds securities from Africa’s largest oil producer to its benchmark index.

Yields on 10-year naira-denominated notes have dropped 372 basis points since Aug. 15, whenJPMorgan Chase & Co. (JPM) said it plans to add the bonds to its GBI-EM Index from Oct. 1, compared with a three basis-points average increase for securities in the measure. Nigeria’s economic outlook is improving as policy makers remove restrictions on foreign investment, control inflation and steady the currency, Giulia Pellegrini, JPMorgan’s sub-Saharan Africa economist, said in an interview two days ago.

Adding Nigeria to the index may lure about $1 billion to the country and increase trading in the $36 billion local debt market, according to JPMorgan. The naira, devalued twice by the central bank since 2008, has risen 2.9 percent this year to 157.76 against the dollar, the best among the 23 most-traded African currencies tracked by Bloomberg.

The inclusion “could be a potential game changer,” said Morten Bugge, chief investment officer at Kolding, Denmark-based Global Evolution (SXGFMFI), which oversees $1 billion and owns Nigerian debt. “It’s a money machine if the currency remains stable. It’s a pretty strong story.”

Oil accounts for 95 percent of the West African nation’s foreign-exchange income and 80 percent of government revenue. Nigeria is Africa’s second-largest economy after South Africa, which has 1.45 trillion rand ($176 billion) of debt on the Johannesburg Stock Exchange, the size of Russia’s ruble market.

JPMorgan’s GBI-EM Index may include Nigerian debt maturing in 2014, 2019 and 2022 in a gradual inclusion starting Oct. 1 and finishing by year-end, according to an Aug. 15 note to clients. The bonds, with a market valuation of $3.2 billion as of August, may represent about 0.59 percent in the index. About $170 billion of assets are benchmarked to the JPMorgan index, according to Pellegrini.

Yields on the nation’s 16.39 percent debt due January 2022 rose six basis points, or 0.06 percentage point, yesterday to 12.37 percent, after hitting a record low of 12.05 percent on Sept. 17, according to data compiled by Bloomberg. Yields on South Africa’s notes due in 2021 rose three basis points to 6.66 percent as of 1:25 p.m. in Johannesburg, while the average in JPMorgan’s GBI-EM broad diversified index fell by two to 5.89 percent.

Record Lows

Nigeria’s seven-year borrowing costs dropped to a record low at a monthly debt auction yesterday. Yields on the 30 billion naira of notes maturing June 2019 plunged 324 basis points from the last sale in August to 12.9 percent, the Debt Management Agency said in an e-mailed statement today.

“Nigeria may not be a South Africa yet, but it’s certainly going towards that direction,” Pellegrini said by phone from London. The country’s “considerable yield premium will also make a number of investors very interested in getting exposure to Nigeria.”

The inclusion will increase foreign investments into Nigeria and may strengthen the naira, the Debt Management Agency said in a statement on Aug. 16.

Central bank Governor Lamido Sanusi lifted a requirement last year for foreign investors to hold local-currency debt for at least one year to attract capital. The removal of the restriction has been key to luring investors and improving liquidity, said Pellegrini.

 

Source: Bloomberg