Nigeria To Be Phased Out Of JP Morgan's Bond Index
Nigeria will be phased out of JP Morgan’s Government Bond Index (GBI-EM) by the end of October, the bank said on Tuesday, after warning that currency controls were making bond market transactions too complex to meet its rules.
When the naira, was weakened by the global plunge in oil prices, Nigeria first used its currency reserves to try to stabilise it, then resorted to market controls as pressure persisted.
The JP Morgan index has around $210 billion in assets under management benchmarked to it. That benchmarking supports investor demand for the bonds in the index.
JP Morgan’s decision to phase Nigeria out of its index, which many investors track, marks the conclusion of a process initiated in January. Some bonds will be removed by the end of September and the rest by the end of October, JP Morgan said.
Earlier, it had said 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 conduct transactions with minimal hurdles.
Nigeria became the second African country after South Africa to be listed in JP Morgan’s emerging government bond index, in October 2012, after the central bank 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 percent 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 Sept 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. To get back in, it has to establish a consistent record of satisfying the index inclusion criteria, such as a liquid currency market.
Removal from the index would force funds tracking it to sell Nigerian bonds they hold, potentially resulting in significant capital outflows. That in turn would raise borrowing costs for Africa’s largest economy, already suffering from a sharp drop in revenue following the plunge in oil prices.
Analysts said JP Morgan’s decision to eject Nigeria came earlier than expected. Most international investors had already exited Nigeria debt last year, it said.
Traders told Reuters on Tuesday the central bank started rationing dollars to foreign investors last week.
Nigeria’s foreign reserves stood at $31.01 billion as at Sept. 7, down 21.6 percent from a year ago, when they were $39.6 billion, the central bank said.
“Nigeria’s inclusion in the GBI-EM index was generally seen as a big step forward in its integration with global financial markets, opening the market to new investment and raising its profile worldwide. That will now be reversed,” said Alan Cameron, an economist at Exotix.
With Nigeria’s removal, countries like Malaysia, Indonesia and Thailand have increased their weight by more 25 basis points as of Aug. 31, JP Morgan said in the note.
Foreign holdings of Nigerian government bonds stood at around $2.75 billion, Samir Gadio, the head of Africa strategy at Standard Chartered Bank said. They had been around $8 billion last September.
He said the market was underweight Nigeria relative to the index before the announcement.
“This will initially trigger excess volatility in the market as exiting offshore accounts and onshore investors may push yields higher,” Gadio said. “A potential exclusion from the GBI-EM indices would make it more difficult to attract foreign portfolio flows in the future as Nigeria will need to rebuild its market credentials.”