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