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.