JPMorgan has threatened to remove Nigeria from its Government Bond Index-Emerging Markets (GBI-EM) by the end of 2015 unless the Central Bank of Nigeria (CBN) restores liquidity to the foreign exchange market. “The key focus will be on consistency and observing a reliable record of liquidity, transparency and minimal hurdles for investors to transact,” JPMorgan said.
The JPMorgan index was launched in June 2005. It is the first comprehensive global local emerging markets index and the most popular and used emerging market debt indexes. Nigeria joined the index in 2012, making it the second African country to be included, the first being South Africa. Nigeria’s 2014, 2019, 2022 and 2024 bonds were added when liquidity was improving. It now makes up 1.8 percent of the GBI-EM Global diversified index.
Should Nigeria be removed from the index, it could lead to a lot of foreign investors selling out their bond holdings, potentially resulting in frantic capital outflow. Demand and supply will run its usually course and bond yields will increase, leading to high borrowing cost and therefore negatively impacting an already wretched economy.
Moving on from the bonds, the tasks placed in front of the new government cannot be ignored. Borrowing money to fund its anticipated high budget deficits and government projects is a necessity considering infrastructural development plans, promises of job availability and projects regarding development of electricity in the country. The high interest rates will only make things more difficult for the government.
The naira will also suffer major devaluation. Since the oil price crisis began in 2014, Nigeria’s foreign exchange and bond market have come under immense pressure. In response to this, the CBN devalued the naira earlier this year in February. Nigeria lost 8.5 percent of its value as a result. If a second devaluation happens, Nigerians will be forced to pay a lot more for everyday needs such as food, fuel, electricity. This will lead to the aggravation of an already unsatisfied populace.
A complete ejection however seems unlikely, according to David Spegel, head of emerging debt at BNP Paribas.“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.”
He added that “eventually, the whole oil issue will be priced into the market and flows of capital and investment will return to Nigeria”.