JP Morgan Chase and Company, a multi-national banking and financial services holding company based in the United States, has announced that Nigeria will be phased out of the Government Bond Index (GMI). Concern of investors over the shortage of liquidity and a lack of transparency in Nigeria’s foreign market have been cited as contributors to JP Morgan’s decision.
This decision poses a threat to Nigeria’s foreign reserves, which is likely to affect foreign investment. It will also impact the Naira, the yield on Nigeria’s debt, and the country’s stock market.
Ibrahim Mu’azu, the Director of Communications for the Central Bank of Nigeria, has expressed disagreement with JP Morgan’s decision, which he revealed in an issued statement last night. The CBN argues that Nigeria was included in the index in October 2012 based on an active domestic market for federal government bonds supported by a Two-Way Quote System, but was assessed based on concerns over operations in the foreign exchange market. The statement was jointly signed by the leading bank, the Federal Ministry of Finance, and the Debt Management Office.
In his statement, Mu’azu noted that CBN policies have started to make a positive impact in Nigeria, particularly in terms of foreign exchange, which JP Morgan overlooked. He posited that the diversification of the domestic investor base, an idea JP Morgan did not agree with, is part of the reason why the Federal Government of Nigeria’s bond market will continue to witness positive activity despite its exclusion from the GBI.
Starting September 30, and culminating in a complete exit by October 30, 2015, the phase out will signal the end to the process which was already introduced in January, 2015; Nigeria was placed on the negative index watch to assess its position in the government bond index over several months. Re-entry into the GBI is only possible after a period of 12 months. The Nigerian government was warned earlier that its currency controls were making bond transactions complicated for tracking investors.
Exclusion from the GBI presents a myriad of difficult challenges for Nigeria, particularly amidst the country’s immediate economic status. However, the CBN and the government stand by these policies, which they argue benefit the Nigerian economy first. Nigeria was initially included in the GBI-EM index to take a much needed step towards its integration into global financial markets, increase market investments, and boost its profile worldwide.
Even though the exclusion from the GBI has put those plans at jeopardy, this could be an opportunity for Nigeria to look upon itself as a means of rescue. For instance, despite the volatility in its nature, the Naira could appreciate if the government plays close attention the manufacturing and export sectors. According to the Wholesale Dutch Auction System (WDAS), Nigeria maintained its appreciation against the US dollar on Monday, exchanging for N148.4 against the previous N149.75. Removal of an order-based two-way market as JP Morgan, would prefer, will result in a gross devaluation of the currency.
Olakunle Ezun, a Currencies Analyst at Ecobank Nigeria points out that, although the prices of the current bond index will be affected following Nigeria’s removal from the GBI and bond yields will rise, a new set of investors that support the local currency through their interest in Nigerian denominated assets will emerge.
Ronak Gopaldas, Head of Country Risk at Rand Merchant Bank in South Africa, stated that Nigeria’s prestige will receive a big blow. Perhaps, if the country takes on the challenge, the expected negative outcome may not be the case.
