CBN says no cause for alarm over JP Morgan delisting bonds

The Nigerian economy will not suffer material damage over the removal of the country from the JP Morgan's Government Bond Index for Emerging Markets (GBI-EMI) says the Central Bank of Nigeria (CBN).

This line is also towed by some analysts who say that Nigeria’s exit from the global index can only be temporary.

The CBN also said that the strong bond market will lead primarily to the strength and diversity of the domestic investor base.

CBN Governor, Godwin Emefiele

According to the CBN, despite the fact that oil prices have fallen by nearly 60 percent in one year, it has called for expectedly reduction of  the amount of liquidity in the market, ensuring that all genuine and effective demand were met, especially those from foreign investors.

In this vein, there was a mandate that all forex transactions were posted online in the Reuters Trading Platform so that all stakeholders can easily verify all transactions in the market. In addition, the Official FX Window at the CBN was closed to ensure a level-playing field in the pricing of foreign exchange.

 Analysts say the JP Morgan action may have scant effect in the short term as good number foreign investors have previously liquidated their Nigerian bond holdings. So, the level of capital outflows from this current episode will be relatively infinitesimal.

 Head, Research & Investment Advisory at Sterling Capital, Mr. Sewa Wusu, says:  “If you look at the total JP Morgan bond portfolio of about $208.29 billion, Nigeria`s FGN bond only constituted about 1.5% which is about $3.12 billion. This implies that this amount will be sold off from the index potentially”. 

Mr Femi Ademola, a research Associate at BGL Plc also said that the exclusion of Nigeria from the JP Morgan's Government Bond Index for Emerging Markets (GBI-EMI) was not an unusual phenomenon.

 He said every Index is created based on inclusion criteria or rules which may be flexible or rigid. Although not sacrosanct, he said the flouting of any of the index inclusion criteria is a ground for exclusion.

Hence, Ademola noted that if the Nigerian currency failed the index criteria on liquidity, it is normal for the bonds to be removed as index constituents. Because the index creation is rule based it does not matter what caused the illiquidity or the actions of the monetary authority in managing the currency volatility, the failure of Naira to meet the required liquidity benchmark could lead to exclusion from the index.

JP Morgan Index fallout, investors may sell-off $2 billion worth Nigeria bonds

As Nigeria smarts from JP Morgan’s forking off her bonds from its emerging market index, analysts say as much as $1.5 to $2 billion dollars may be shed by investors on Nigerian bonds.
As direct result from the JP Morgan action, the yield on Nigeria's 10-year bond has jumped from 16.2 per cent yesterday morning to 16.7 per cent today, according to data obtained from Bloomberg.
Nigeria accounts for 1.5 per cent of the largest GBI-EM Global Diversified index, which is tracked by $183.8bn.
Samir Gadio, head of Africa Strategy at Standard Chartered, said:
There's a risk we see a further spike in yields as foreign investors exit and domestic investors will turn more bearish
The removal of Nigerian government bonds from the GBI-EM indices will be seen as a setback for Nigeria (and the wider frontier Sub-Saharan African region) after a series of successful reforms to develop capital markets from the mid-2000s.
The country's external credentials may also be affected. Being a GBI-EM country highlighted Nigeria's achievements in building sophisticated and vibrant financial markets over the past decade… this exclusion could also make it more difficult to attract much-needed portfolio inflows
The Nigerian government introduced a series of restrictions on foreign exchange transactions earlier this year as the naira collapsed amid a rout in oil prices. Oil accounts for the vast majority of government revenue and foreign FX inflows.
The naira fell 24 per cent against the dollar between November 2014 and February 2015, before the restrictions capped it at about 200 per dollar.
The exclusion from the indexes could result in further FX restrictions, as it removes the incentive for the government to liberalise foreign exchange.
Yvonne Mhango at Renaissance Capital says:
Now that JP Morgan has removed Nigeria from the EM bond index, we think there is even less reason/urgency for the CBN to allow the naira to depreciate, and to relax the FX restrictions.
The risk is we may see further FX restrictions being imposed in the near term, given that Nigeria will lose about $2bn of capital at a time when the CBN is avidly trying to conserve reserves.
An auction of Nigerian bonds scheduled for next week could be hit by the exclusion. Mr Gadio at Standard Chartered said the Debt Management Office may cap yields at the auction. He said:

when markets are extremely volatile, they may sell less than initially advertised which allows to issue the bonds at lower yields than required by investors. For example, this happened in July.

Source:

http://www.ft.com/fastft/389131/nigerian-bonds-slide-after-jpmorgan-index-exit

JP Morgan to remove Nigeria from government bond index

JP Morgan will remove Nigeria from its Government Bond Index (GBI-EM) by the end of October, the bank said on Tuesday, after warning the government of Africa's biggest economy that currency controls were making transactions too complicated.

Godwin Emefiele, CBN Governor

The removal will force funds to sell Nigerian bonds, triggering potentially significant capital outflows and raising borrowing costs for the government.
Struggling with a plunge in vital oil revenue, Nigeria had imposed currency restrictions to defend the naira after the burning of dollar reserves failed to halt a slide.
The JP Morgan index tracks around $210 billion in assets under management.
Some bonds will be removed from the index by the end of September and the rest by the end of October, JP Morgan said.
The bank had warned Nigeria that to stay in the index, it 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 requirement that foreign investors hold government bonds for a minimum of one year before exiting.

 Source:
http://www.reuters.com/article/2015/09/0
8/nigeria-bonds-index-idUSL5N11E3Y320150908