FG: Nigeria's Interest Paramount as JP Morgan Delists FGN Bonds

Godwin Emefiele

• In rare joint statement, CBN, finance ministry, DMO say demand for bonds remains strong

Obinna Chima
In a rare joint reaction to the decision by US investment bank, JP Morgan to phase out Federal Government of Nigeria (FGN) Bonds from its Government Bond Index for Emerging Markets (GBI-EM) by the end of October, the Federal Ministry of Finance, Central Bank of Nigeria (CBN) and Debt Management Office (DMO) yesterday said Nigeria and the interest of Nigerians were paramount, and will continue to take economic decisions that will impact positively on the lives of all citizens.

In a statement signed by CBN’s Director Corporate Communications, Mr. Ibrahim Mu’azu, on behalf of the three institutions responsible for the management of the Nigerian economy, they also said “the market for FGN Bonds remains strong and active due primarily to the strength and diversity of the domestic investor base”.

Reuters yesterday reported that JP Morgan will by October ending phase out Nigeria from its bond index, warning that currency controls introduced by the CBN in recent months were making bond market transactions too complex to meet its rules.

When the naira was weakened by the global plunge in oil prices, Nigeria first used its currency reserves to try to stabilise it, then resorted to market controls as pressure persisted.

JP Morgan’s decision to phase Nigeria out of its index which many investors track, marked the conclusion of a process initiated in January, Reuters reported.

Some bonds will be removed by the end of September and the rest by the end of October, JP Morgan said.
Earlier, it had said that to stay on the index, Nigeria would have to restore liquidity to its currency market in a way that allows foreign investors tracking the index to conduct transactions with minimal hurdles.

“Foreign investors who track the GBI-EM series continue to face challenges and uncertainty while transacting in the naira due to the lack of a fully functional two-way FX market and limited transparency. As a result, Nigeria will be removed from each of the six GBI-EM indices starting Sept 30,” the bank said in a note.

The central bank had to devalue the naira and pegged it at a fixed rate against the dollar, turning trading into a one-way quote currency market whose lack of transparency angered investors and businesses.

The index provider said Nigeria would not be eligible for re-inclusion in the index for a minimum of 12 months. To get back in, it has to establish a consistent record of satisfying the index inclusion criteria, such as a liquid currency market.

Removal from the index would force funds tracking it to sell Nigerian bonds they hold, potentially resulting in significant capital outflows.
That in turn would raise borrowing costs for Africa's largest economy, already suffering from a sharp drop in revenue following the plunge in oil prices.

But in its response to the decision by JP Morgan, the finance ministry, CBN and DMO said: “While we respect the right of JP Morgan to make this decision, we would like to strongly disagree with the premise and conclusions upon which the decision rests.”

They recalled that Nigeria was included on the index in October 2012, based on the existence of an active domestic market for FGN Bonds supported by a two-way quote system, dedicated market makers and diverse investors.

“However, in January 2015, JP Morgan placed Nigeria on an index watch as a result of their concerns in the operations of our foreign exchange market, namely: 1) lack of liquidity for transactions; 2) lack of transparency in the determination of the exchange rate; and 3) lack of a fully functional two-way forex market.

“In our continuous bid to strengthen the Nigerian financial market and enhance our status as a preferred destination for investors, we took measures to improve the market.

“Despite the fact that oil prices have fallen by nearly 60 per cent in one year, which should expectedly reduce the amount of liquidity in the market, the CBN ensured that all genuine and effective demand was met, especially those from foreign investors.

“On transparency, the CBN mandated 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 forex window at the CBN was closed to ensure a level-playing field in the pricing of foreign exchange,” the statement said.

The three Nigerian institutions further drew the attention of JP to the existence of a functional two-way forex market in Nigeria, adding however that given the high propensity for speculation, round tripping, and rent-seeking in the market, “it became imperative that participants are not allowed to simply trade currencies but are only in the market to fulfill genuine customer demand to pay for eligible imports and other transactions”.

“In the light of this, we introduced an order-based, two-way forex market, which has resulted in the stability of the exchange rate in the interbank market over the past seven months and largely eliminated speculators from the market.

“Despite these positive outcomes, JP Morgan would prefer that we remove this rule, even though it is obvious that doing so would lead to an indeterminate depreciation of the naira.

“With dwindling oil prices, we believe that an order-based two-way market best serves Nigeria’s interest at the moment,” they maintained.
The ministry, CBN and DMO added that they shall continue to ensure that there is liquidity and transparency in the market, they assured JP Morgan and other investors that the market for FGN Bonds remained strong and active due primarily to the strength and diversity of the domestic investor base.

“For the avoidance of doubt, the federal government sees Nigeria and the interest of Nigerians as paramount. It will therefore only continue to take economic decisions that will impact positively in the lives of all Nigerians,” they stated.

The JP Morgan index has around $210 billion in assets under management benchmarked to it. That benchmarking supports investor demand for the bonds on the index.

Nigeria became the second African country after South Africa to be listed on the JP Morgan emerging government bond index in October 2012 after the central bank removed the restriction for foreign investors to hold government bonds for a minimum of one year before they could exit.

The index added Nigeria’s 2014, 2019, 2022 and 2024 bonds, giving Africa’s biggest economy a weight of 1.8 per cent on the index.
Analysts said JP Morgan's decision to eject Nigeria came earlier than expected. Most international investors had already exited Nigeria’s debt last year, it said.

Traders told Reuters yesterday the central bank started rationing dollars to foreign investors last week.
Nigeria’s foreign reserves stood at $31.01 billion as at September 7, down 21.6 per cent from a year ago, when it was $39.6 billion, the central bank said.

“Nigeria’s inclusion in the GBI-EM index 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 said.
With Nigeria’s removal, countries like Malaysia, Indonesia and Thailand have increased their weight by more 25 basis points as of August 31, JP Morgan said in the note.

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

He said the market was underweight Nigeria relative to the index before the announcement.
“This will initially trigger excess volatility in the market as exiting offshore accounts and onshore investors may push yields higher,” 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.”

Culled from Thisday