JP Morgan’s disclosure that it could remove Nigeria from its Government Bond Index (GBI-EM) over the next three to five months is currently the biggest threat to Africa’s largest economy. The banking giant said on Friday that it would assess Nigeria’s suitability to remain in the key emerging currency bond index because of a lack of liquidity in the African country’s forex and bond markets, reuters reported. It has already placed Nigeria on a negative index watch.

If Nigeria is removed from the index, it would force funds tracking it to sell off the country’s bonds from their portfolios, which would cause significant capital outflows. Such an incident will raise borrowing costs for the country whose finances have already been thinned by drastically reduced oil revenues. According to Reuters, investors have $216 billion benchmarked to the GBI-EM, the most popular emerging local debt index. But the bank said the current liquidity issues made it hard for foreign investors to replicate it. “If we are unable to verify sufficient liquidity in Nigeria’s spot FX and local treasury bond market … it will trigger a review … for removal,” the agency quotes JP Morgan. “Conversely, if liquidity improves and investors are able to transact with minimal hurdles, Nigeria will be removed from index watch negative.”

Nigeria has, since its debt-relief of 2004, twice raised money from Eurobonds; first in 2011 with a $500 million 10-year Eurobond and then in 2013 when it issued a $500 million five-year bond at a yield of 5.375 percent and a $500 million 10-year bond with a yield of 6.625 percent.

However, analysts said they did not expect JP Morgan to take such a critical step. David Spegel, head of emerging debt at BNP Paribas, told Reuters; “I would be very surprised if Nigeria was ejected from the index entirely given the size of the economy and potential for future capital raising in the debt and equity markets there…. Eventually the whole oil risk issue will be priced into the market and flows of capital and investment will return to Nigeria,” Spegel said.

Nigeria became the second African country after South Africa to be included in the very popular index in 2012, when liquidity was improving. It added Nigeria’s 2014, 2019, 2022 and 2024 bonds, which make up 1.8 percent of the GBI-EM Global Diversified index. But the drastic fall of global oil prices, Nigeria’s main export, has put the country’s forex and bond markets under severe pressure. The oil crises have caused a rapid fall in the Naira, dropping 13 percent of its value in 2014. Although the Central bank has devalued the local currency by 8 percent and tightened trading rules to curb speculation, it continues to struggle against the dollar.

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