Nigeria’s dwindling foreign reserve is beginning to have a telling effect on the country’s credit worthiness. JP Morgan has served notice that it will eject Nigeria from its Government Bond Index for Emerging Markets by the end of Year 2015 if it fails to restore liquidity to its currency markets in a way that will allow foreign investors tracking the benchmark to transact with minimal hurdles.
JPMorgan would have ejected the country this month. But it shifted the action till December 2015 to allow the newly installed administration of President Muhammadu Buhari time to settle down and increase liquidity in its currency markets or face ejection from the bond index.
JP Morgan, which runs the most commonly used emerging debt indexes, placed Nigeria on a ‘negative index watch’ in January and then said it would assess its place on the index over a three to five months period.
“Nigeria’s status in the GBI-EM series will be finalised in the coming months but no later than year-end,” JPMorgan said.
Removal from the index will force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows.
This in turn will raise borrowing costs for Nigeria which is already suffering from a sharp drop in revenue following a plunge in oil prices.
Nigeria’s foreign exchange and bond markets have come under pressure after the price of oil, its main export, plunged.
In response, the Central Bank of Nigeria fixed the exchange rate in February after devaluing the naira last year and tightened trading rules to curb speculation. The naira has lost 8.5 per cent this year.
“If we are unable to verify these factors, a review of Nigeria’s status within the benchmark for removal will be triggered,” it said in a report, adding that the factors included a liquid currency market.
JP Morgan added Nigeria to the widely followed index in 2012, when liquidity was improving, making it the second African country after South Africa to be included. It added Nigeria’s 2014, 2019, 2022 and 2024 bonds.
The bank said Nigeria continues to remain eligible for the GBI-EM index, which has around $210bn in assets under management benchmarked to it, with a weight of 1.8 per cent.
The CBN had last week made a tiny adjustment to its exchange rate peg to the dollar, which analysts said indicates that it was beginning to think about how to loosen its currency regime.
Analysts do not expect JP Morgan to remove Nigeria. The Head, Research and Investment Advisory, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said he expected policy changes and reforms in the oil sector by the new government to enhance economic stability, higher external reserves balance and subsequently liquidity in the currency markets. “It is a good thing that they have given us more time. We expect better changes in the economy over the next six months. I don’t think Nigeria will be ejected by December. Economic stability should also lead to inflows into Nigeria,” Ebo said.
By Dike Onwuamaeze