JPMorgan a fortnight ago 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 (forex) 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.
This has generated argument as to what the implication of ejecting the country from the global bond market index could be.
Economic and finance experts want Nigeria to ensure that its bonds are not removed from JPMorgan GBI-EM because it could lead to massive outflow of foreign investments with investors selling down bond holdings.
Demand and supply will run its usual course and bond yields will increase, leading to high borrowing cost and therefore negatively impacting an economy already under revenue pressure.
Ayodeji Ebo, Head of Research and Investment Advisory Services at Afrinvest West Africa, said this is not a welcome development especially in the new administration of President Muhammadu Buhari.
Ebo sought policy changes and reforms in the oil sector to enhance economic stability, external reserves, and liquidity in the currency markets.
“It is a good thing 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,” he enthused.
David Spegel, Head of Emerging Debt at BNP Paribas, a leader in global banking and financial services based in the United Kingdom, also expressed belief that Nigeria will not be removed from the index.
“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 explained in an emailed note.
“Eventually, the whole oil issue will be priced into the market and flows of capital and investment will return to Nigeria.”
Moving on from the bonds, the tasks for the government cannot be ignored. Borrowing money to fund high budget deficits and projects is a necessity, considering plans for infrastructure and job creation, and fixing power supply.
If Nigeria is deleted from the index, the high interest rates will only make things more difficult for the government to raise funds and the naira will also suffer major devaluation.
Since the oil price fall began in 2014, Nigeria’s forex and bond market have come under immense pressure.
In response, the CBN fixed the exchange rate in February this year after devaluing the naira in 2014 and tightening trading rules to curb speculation. The naira has lost 6.65 per cent by Wednesday, June 17.
“If we are unable to verify these factors, a review of Nigeria’s status within the benchmark for removal will be triggered,” JP Morgan said in a report, adding that the factors included a liquid currency market.
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.
It included Nigeria 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.
JPMorgan, which runs the most commonly used emerging debt indexes, placed Nigeria on a ‘negative index watch’ in January and said it would assess its place on the index over a period of three to five months.
“Nigeria’s status in the GBI-EM series will be finalised in the coming months but no later than year-end,” it said.
Removal from the index will force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows.
If a second devaluation happens, Nigerians will be forced to pay a lot more for everyday needs such as food, fuel, electricity.