Removal from JP Morgan Index increases pressure on Nigeria

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In a move that underlines the growing concerns in the domestic foreign exchange (FX) market, JP Morgan has decided to remove Nigerian bonds from its Global Bond Index – Emerging Market (GBI-EM)–in a two-stage process (in September and October) due to a lack of a fully functioning FX market and concerns over dollar availability/liquidity.

Nigerian bonds were included for the first time in October 2012, so such a swift reversal undermines Nigeria’s credibility in global markets. Despite successive measures introduced by the Central Bank of Nigeria (CBN) over recent months that have aimed to reduce dollar demand, and a forewarning from JP Morgan in that the dollar liquidity needed to improve, the situation has remained a concern.

This has been contested by the authorities, who have stated that dollar liquidity has been improving. FX reserves of $31bn as of September 7are down more than one-fifth compared to one year ago. Analysts believe that while many foreign investors that had invested in Nigerian bonds outside of the GBI-EM have already reduced their exposure to Nigerian bonds, the index review will lead to a sell-off in foreign holdings of around $3bn of Nigeria’s GBI-EM debt as investors alter their portfolio allocations.

‘As a result, secondary market prices will fall, pushing yields up, which in turn will raise the cost for the government to raise new debt at a time when oil revenues are weak and other sources of finance are limited,’ Ecobank commented in a research note.

‘The effect on interbank liquidity is likely to be minimal given the existing constraints on accessing dollars. However, the backlog of dollar demand orders will grow, maintaining pressure on the NGN over the short term. Indeed, any naira pressures will likely be absorbed by CBN interbank intervention, but at a cost – FX reserves will need to be drawn down to offset these pressures,’ it added.

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