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Bond Market remains attractive despite JPMorgan delisting

By on September 18, 2015

The Director General of the Debt Management Office (DMO), Dr. Abraham Nwankwo, on Wednesday reassured Nigerians that the recent announcement by JPMorgan Chase & Co. to phase out Federal Government of Nigeria (FGN) Bonds from its Government Bond Index-Emerging Markets (GBI-EM) would not have a negative impact on the country’s bond market.

He said even though the share of allotment at the auctions to foreign investors dropped from 15.51 per cent in 2003 to 3.34 per cent in 2014, the domestic bonds market has remained stable and internally-driven.

He said although the announcement by the US investment bank to delist Nigerian bonds starting from September 30 was unwelcoming, it did not in any way signify a downturn or collapse of the local bond market and would not downgrade the bonds.

Nwankwo stated that JPMorgan’s decision was not necessarily guided by its perception of Nigerian bonds but by the activities in the foreign exchange market, which it claimed lacked a fully functional two-way quote system and had limited transparency.

Speaking to journalists at a media briefing organised to provide further clarification on the proposed delisting, he argued that since the Nigerian bond market had been successfully developed and diversified before JPMorgan sought to include it on its indexes in 2012, delisting Nigerian bonds would have almost no impact on the quality of securities in particular and the local market in general.

He contended that since JPMorgan included Nigeria on its indexes of its own volition because of the success of the country’s bond market, phasing out the bonds should not have been dramatised.

Pointing out that only Nigeria and South Africa were the only countries on the continent on the JPMorgan index, he said being listed on the index does not determine the viability or otherwise of bond markets.

The DMO boss said the exclusion of Nigeria from the index would not also connote that the domestic market was weaker, stressing that the bond market has a predominantly well-diversified domestic base that can offset any external shock.

However, he argued that the real problem for the country was not really what JPMorgan intends to do but the local media and analysts’ misinterpretation of the announcement to delist Nigerian bonds from the index.

According to him, the Nigerian bond market does not rely on JPMorgan’s perception to thrive since the market existed before the bank enlisted it.

He said it was important that the local media acts as a countervailing force against the proposed delisting rather than build sentiments from the announcement.

Nwankwo said currently, the Nigerian bond market remained resilient and adequately funded in spite of the fiscal crisis occasioned by the drop in oil prices, adding that Nigerian bond options had continuously been over-subscribed while prices and yields were likely to be more favourable.

He said: “The reaction of JPMorgan is its perception of the foreign exchange market and not a reflection of the bond market.”

He added that even the so-called volatility in the forex market had been adequately addressed and publicised by the Central Bank of Nigeria (CBN).

He further noted that developments in the forex market largely arose from the global collapse in oil prices which was not peculiar to Nigeria alone.

He said: “The Nigerian economy has proven to be more resilient than many other economies following the drop in oil prices.”

He said rather than dissipate energy on JPMorgan’s decision, analysis should focus on the need for all Nigerians to further diversify the economy from the dangers of oil price volatility.

He said the media should also be able to appreciate the success recorded in the domestic bond market.

According to him, “The phasing out of FGN Bonds from the index does not amount to a downgrade of Nigeria or FGN Bonds since JPMorgan is not a credit rating agency or have any impact on the quality of the FGN Bonds.

“FGN Bonds remain risk-free securities that are backed by the full faith and credit of the Federal Government of Nigeria and are charged upon the general assets of Nigeria, or imply that the bonds are no longer liquid.

“FGN Bonds are supported by an active secondary market which allows investors to buy or sell them on any business day through any of the 13 primary dealer market makers licensed by the DMO or on the Nigerian Stock Exchange where the bonds are listed and for which purpose there is a government stockbroker.”

He said it does not also “imply that foreign investors cannot or will not be allowed to invest in FGN Bonds or the Nigerian financial markets as a whole.

“While the index is a strong tool for attracting foreign investors to invest in a domestic market for which Nigeria derived some benefits, investors who have confidence in the potential of Nigeria and the reforms targeted at their realisation, will still see Nigeria as an attractive investment destination”.

He noted that DMO and other stakeholders remained committed to the further development of the Nigerian bond market due to its strategic role of mobilising long-term capital to financial growth and development.

“The phasing out of FGN Bonds from the GBI-EM by JPMorgan does not dampen this collective resolve. Accordingly, the DMO working with other stakeholders will continue to introduce measures that will sustain the achievements recorded so far in the FGN Bond primary and secondary markets.

“More importantly, investors and other participants in the FGN Bond market should continue with their long standing interest in the market being fully aware that the bonds remain the very safe and liquid securities they have always been,” he said.

Also, Director of the Market Development Department, DMO, Mrs. Patience Oniha, said since JPMorgan’s initial inclusion did not add any collateral to FGN securities, all bond options eventually phased out from the index would retain their quality.

 

[ThisDay]