With $45bn Turnover, FX Stability Nigeria’s Prospect of Re-joining JP Morgan Index Brightens

About 20 months after JP Morgan, the largest financial services holding company in the United States and world’s fifth largest bank, delisted Nigerian bonds from its Government Bond Index-Emerging Market (GBI-EM), the managers of the second largest economy in Africa tended to wake up to their responsibilities. Nigerian economic managers moved to restore sanity to the foreign exchange market

The reasons given by JP Morgan for delisting Nigeria from its GBI-EM in October 2015, exactly three year after the country was included on the Index, was lack of liquidity and transparency in the country’s foreign exchange market.

The JP Morgan Index tracks local currency bonds issued by emerging market governments.

The announcement of Nigeria’s removal from the index resulted in foreign investors selling off their holdings of Nigeria’s bonds. Foreign holdings of Nigerian government bonds were estimated to be about $2.75 billion at the point when JP Morgan took the action.

“Foreign holdings of Nigerian government bonds stood at around $2.75 billion. They had been around $8 billion last September,” the head of Africa strategy at Standard Chartered Bank, Samir Gadio, said.

Notwithstanding the delisting and its implications on the Nigerian economy, JP Morgan said Nigeria would be eligible for re-inclusion if it could uphold the inclusion criteria for at least 12 months. This means the authorities must restore liquidity to the forex market in a way that allows foreign investors tracking the index to conduct transactions with minimum hurdle.

Nigeria has met the requirement for re-engagement, having successfully implemented the Investors and Exporters Window (I&E) in the last one year. The initiative, which was initially unpopular among Nigerians, especially experts in the financial industry, has now been described as a game changer in the Nigerian foreign exchange market.

“Nigeria’s inclusion in the GBI-EM index in October 2012 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,” an economist at Exotix, Alan Cameron, had said.

Reacting to the exclusion of Nigeria 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.”

But the man in the eye of the storm then, Abraham Nwankwo, the former Director-General of Debt Management Office, argued that Nigeria’s removal from the index “does not amount to a downgrade of Nigeria or FGN Bonds since JP Morgan is not a credit rating agency”.

Nwankwo added, “It does not have any impact on the quality of the FGN bonds. They remain risk-free securities that are backed by the full faith and credit of the federal government and are charged upon the general assets of Nigeria. It does not imply that the bonds are no longer liquid.”

Nwankwo also said FGN bonds were supported by an active secondary market, which allowed investors to buy or sell them on any business day.

In the last 12 months, Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, has taken the bull by the horns to consistently intervene in the Nigerian Foreign Exchange Market with the creation of Investors’ and Exporters’ FX Window.    (Thisday)