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JPMorgan may eject Nigeria from Key Bond Index by December

By on June 9, 2015

JPMorgan will eject Nigeria from its Government Bond Index (GBI-EM) by the year-end unless the country restores liquidity to its currency market in a way that will allow foreign investors tracking the benchmark to transact with minimal hurdles.

The international bank at the weekend, said it had extended the deadline to eject Africa’s biggest economy by another six months to take into account the arrival of President Muhammadu Buhari.

Buhari was inaugurated as Nigeria’s democratically elected president on May 29, 2015, after a closely-fought presidential election in March, in which he defeated former President Goodluck Jonathan.

JPMorgan, which runs the most commonly used emerging debt indices had placed Nigeria on a negative index watch in January and then said it would assess its place on the index over a three to five months period.

“Nigeria’s status in the GBI-EM series will be finalised in the coming months but no later than year-end,” Reuters quoted JPMorgan to have said.
However, analysts pointed out that it would not be in the interest of JPMorgan to see Nigeria excluded from that index.

Removal from the index would force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows. This in turn would raise borrowing costs for Africa’s largest economy, already suffering from a sharp drop revenue following a plunged in oil prices.

Nigeria’s forex and bond markets have come under pressure after the price of oil, Nigeria’s main export, plunged.

In response, the central bank had fixed the exchange rate in February, after devaluing the naira last year and tightened trading rules to curb speculation. The naira has lost 8.5 per cent this year.

“If we are unable to verify these factors, a review of Nigeria’s status within the benchmark for removal will be triggered,” JPMorgan said the report, adding that the factors included a liquid currency market.

Head of Research/Chief Economist, Africa, with Standard Chartered Bank, Razia Khan, had told THISDAY that: “The CBN has gone a great length to say for exiting foreign portfolio investors, it has provided all the foreign exchange liquidity that was demanded. The point has been made that it is not in the interest of Nigeria and also not in the interest of the index provider to see Nigeria actually excluded from that index.

“What we do know is that Nigeria has seen sizable flows into its bond market even prior to its index inclusion. Now, obviously, that got an additional boost from its inclusion on that index and it would send a negative signal if it is to be excluded especially for reasons around forex liquidity.”

The Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, had assured jittery investors that the CBN was “doing everything possible” to ensure that the country remained on the JP Morgan Index in order to avoid the adverse consequences which the country’s exclusion could cause.

JPMorgan had added Nigeria to the widely followed index in 2012, when liquidity was improving, making it only the second African country after South Africa to be included. It then added Nigeria’s 2014, 2019, 2022 and 2024 bonds.

The bank said Nigeria continues to remain eligible for the GBI-EM index, which has around $210 billion in assets under management benchmarked to it, with a weight of 1.8 per cent.

The central bank last week made a tiny adjustment to its exchange rate peg to the dollar, which Reuters quoted an analyst to have said may indicate that it is beginning to think about how to loosen its currency regime.

 

[ThisDay]