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JP Morgan expels Nigeria from bond index

The United States-based lender, JP Morgan, on Tuesday said Nigeria would be phased out of its Government Bond Index by the end of September due to alleged lack of liquidity and transparency in the nation’s foreign exchange market.

JP Morgan had on January 16 placed Nigeria on a negative index watch on the Government Bond Index.

The bank, which runs the most commonly used emerging debt indexes, said it placed Nigeria on a negative index watch and would assess its place on the GBI over the few months.

The American bank had warned that currency controls by the Central Bank of Nigeria were making Nigeria’s bond market transactions too complex to meet its rules.

JPMorgan’s action could put the nation’s $31bn external reserves under threat as it may lead to further massive sell-offs of Nigerian assets by foreign portfolio investors.

The reserves are expected to deplete further as a result of this decision.

When the global plunge in oil prices hit the naira, the CBN sought initially to support it using external reserves, but had to resort to market controls as pressure persisted.

The JP Morgan index has around $210bn in assets under management benchmarked to it, supporting investor demand for the bonds it includes.

JP Morgan’s decision to phase Nigeria out of its index, which many investors track, marks the conclusion of a process initiated in January.

JP Morgan said the phase-out would take place between September 30 and October 30.

It had said earlier that to stay in the index, Nigeria would have to restore liquidity to its currency market in a way that allowed foreign investors tracking the index to transact with minimal hurdles.

Nigeria became the second African country after South Africa to be listed on the JP Morgan’s emerging government bond index in October 2012 after the CBN had removed a restriction for foreign investors to hold government bonds for a minimum of one year before they could exit.

The index added Nigeria’s 2014, 2019, 2022 and 2024 bonds, giving Africa’s biggest economy a weight of 1.8 per cent in the index.

“Foreign investors who track the GBI-EM series continue to face challenges and uncertainty while transacting in the naira due to the lack of a fully functional two-way FX market and limited transparency. As a result, Nigeria will be removed from each of the six GBI-EM indices starting September 30,” the bank said in a note.

The central bank had to devalue the naira and pegged it at a fixed rate against the dollar, turning trading into a one-way quote currency market whose lack of transparency angered investors and businesses.

The index provider said Nigeria would not be eligible for re-inclusion in the index for a minimum of 12 months and this was dependent upon a consistent track record of satisfying the index inclusion criteria such as a liquid currency market.

Analysts said the development would force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows and this in turn would raise borrowing costs for the country.

The Head of Economic Research, Ecobank, Mr. Angus Downie, however, had said this would only have limited impact in the short term because many foreign investors had already liquidated their Nigerian bond holdings, adding, “The level of capital outflows from this event will be relatively small.”

The EMBI is JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries, and the family of the EMBI is the most widely used and comprehensive emerging market sovereign debt benchmark, according to Financial Times.

JP Morgan added Nigeria to the index in 2012 when liquidity was improving, making it the second African country after South Africa to be included.

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