JP Mor­gan delist: Nige­ria may lose $2.5bn

Daily Trust - - BUSINESS - From Kay­ode Ogun­wale and Mo­hammed Shosanya, La­gos

There are fears Nige­ria may lose up to N492.5 bil­lion ($2.5 bil­lion) worth of in­vest­ments af­ter US in­vest­ment banker JP Mor­gan Chase & Co. an­nounced it would yesterday make good its threat to delist Nige­ria from its Gov­ern­ment Bond In­dex for Emerg­ing Mar­kets (GBI-EM).

Gover­nor of the Cen­tral Bank of Nige­ria (CBN) Mr God­win Eme­fiele, has, how­ever, al­layed what­ever fears are be­ing ex­pressed with the op­ti­mism that the coun­try would soon be back on the in­dex when the econ­omy be­gins to gain from mea­sures aimed at boost­ing the of­fi­cial for­eign ex­change regime. Such mea­sures in­clude ex­pul­sion of some items from be­ing funded in the of­fi­cial forex mar­ket.

JP Mor­gan had, early last month, an­nounced the phased re­moval of Nige­ria from its GBI-EM in­dices of lo­cal cur­rency gov­ern­ment bonds for fail­ing its liq­uid­ity and trans­parency tests. The US bank an­nounced on Tues­day it would, yesterday, re­move half of Nige­ria’s bond listed on its GBI-EM, and the rest this month.

The CBN, Fed­eral Min­istry of Fi­nance and Debt Man­age­ment Of­fice (DMO), in swift re­ac­tion, had de­fended the re­cent eco­nomic poli­cies, ob­ject­ing the premise and con­clu­sions upon which the de­ci­sion of JP Mor­gan was based.

Sev­eral an­a­lysts who spoke with the Daily Trust yesterday were of the opin­ion that apart from the plug which the de­ci­sion would put on for­eign port­fo­lio in­vest­ments, the few for­eign in­vestors within the sys­tem were not un­likely to with­draw.

Man­ag­ing Di­rec­tor, Global Chief Economist and Head of Macro Strat­egy at Re­nais­sance Cap­i­tal, Charles Robert­son said, “We hear that in­vestors may with­draw $2.5bn from Nige­ria due to this ex­clu­sion. In­vestors will still con­sider in­vest­ing in Nige­ria, but they will not in­vest much when they fear a po­ten­tial de­val­u­a­tion. With oil around present lev­els, mar­kets still ex­pect de­val­u­a­tion.”

The in­clu­sion of the FGN Bonds in Oc­to­ber 2012 had trans­lated to an es­ti­mated in­flow of $1.5bn on the as­sump­tion that its tracker in­vestors would ad­just their hold­ings to make the new en­trant mar­ket-weigh, but an­a­lysts at FBN Cap­i­tal say these in­vestors will have ex­ited Nige­ria by the end of Oc­to­ber, the sec­ond and fi­nal phase of the process.

The an­a­lysts said, “This would prob­a­bly leave a max­i­mum of $1bn in­vested by the off­shore com­mu­nity in an all naira-de­nom­i­nated Nige­rian gov­ern­ment pa­per. The FGN do­mes­tic debt amounted to N8.40 tril­lion ($42bn) as at June end­ing.”

Also Man­ag­ing Di­rec­tor and Chief Ex­ec­u­tive Of­fi­cer of RTC Ad­vi­sory Ser­vices, Opeyemi Ag­baje feared that the ex­clu­sion will not be good for Nige­ria. “Our eco­nomic pol­icy is be­com­ing very costly. It is cost­ing us around N1.6trn on the cap­i­tal mar­ket, there is out­put de­cline and it is cost­ing us jobs,” he stated.

Not­ing that there are no in­di­ca­tions that ac­tions will be taken to guard against the fi­nal delist­ing in this month, Ag­baje sug­gested that the Pres­i­dent Muham­madu Buhari ad­min­is­tra­tion con­sti­tute a strong eco­nomic team that would ei­ther for­mu­late strong po­lices or de­value the cur­rency. He main­tained that the ex­clu­sion would im­pair the abil­ity of the gov­ern­ment to fi­nance bud­get deficit from the bond mar­ket.

Also, an an­a­lyst at Ecobank, Olakunle Ezun noted that the ex­clu­sion would cre­ate a neg­a­tive ef­fect on the prices of cur­rent bond port­fo­lios, adding “How­ever, the sub­se­quent rise in bond yields should pro­vide a new re-en­try point for in­vestors in­ter­ested in Nige­rian de­nom­i­nated as­sets, which in turn will help boost for­eign ex­change in­flows thereby sup­port­ing the naira.

“Bond yields will rise, which in turn would in­crease pres­sure on the naira. This will heighten the naira volatil­ity, with fur­ther de­pre­ci­a­tion most likely. As such we ex­pect the CBN to ei­ther in­crease the vol­ume/fre­quency of in­ter-bank for­eign ex­change in­ter­ven­tion or de­value the naira by another 18 per cent to N230/$.”

He, how­ever, noted that do­mes­tic in­vestors would re­main con­fi­dent about pos­i­tive real re­turns in naira-de­nom­i­nated as­sets, “but they might need to re­assess port­fo­lio com­po­si­tion in or­der to take ad­van­tage of the ex­pected rise in bond yields.

An­a­lysts at Meris­tem Se­cu­ri­ties Lim­ited, speak­ing on its im­pact on the eq­ui­ties mar­ket, said the per­for­mance of the eq­ui­ties mar­ket in the year so far has been partly due to the lack of par­tic­i­pa­tion by for­eign in­vestors, who have al­luded to the cur­rency as not be­ing ‘fairly priced’.

They said it had been widely an­tic­i­pated that there might be a fur­ther de­val­u­a­tion of the cur­rency to align with gen­eral mar­ket per­cep­tions, although they men­tioned that the CBN has ve­he­mently de­nied it would pan­der to these ex­pec­ta­tions.

“The an­tic­i­pated resur­gence of the eq­ui­ties mar­ket has been heav­ily premised on the ex­pec­ta­tions that the for­eign mar­ket would be lib­er­al­ized, with most mar­ket par­tic­i­pants pre­dict­ing a year-end dead­line for this due pri­mar­ily to the dead­line given by the man­agers of the JP Mor­gan in­dex, shirk­ing the adamant protes­ta­tions of the apex au­thor­ity to the con­trary.

Given re­cent hap­pen­ings, we do not an­tic­i­pate a sus­tained resur­gence in the near-term un­less the apex au­thor­ity’s stoic stance re-in­stils con­fi­dence,” the an­a­lysts de­clared.

Head, Re­search & In­vest­ment Ster­ling Cap­i­tal Lim­ited, Mr. Sewa Wusu, said it is time for Nige­ria to look in­ward to di­ver­sify its econ­omy away from oil. Wusu said there are other crit­i­cal sec­tors that can in­duce pos­i­tive growth, cre­ate jobs and make the coun­try a pro­duc­tive econ­omy and con­trib­ute to in­crease for­eign ex­change earn­ings.

“Our na­tional in­ter­est is very para­mount to our de­vel­op­ment as a na­tion. The CBN has done a lot to cur­tail the ex­tremes in the for­eign ex­change mar­ket due to round trip­ping and ar­bi­trage op­por­tu­ni­ties”, he said.

Wusu stressed that Nige­ria can quickly com­mence the path of de­vel­op­ing other sec­tors of its econ­omy with the po­ten­tial for growth to boost the for­eign ex­change earn­ings po­ten­tial.

“Clear-cut poli­cies should be adopted to fund these sec­tors, e.g. min­ing, agri­cul­ture, health, con­struc­tion, ed­u­ca­tion, tourism and trans­porta­tion.

By the time our econ­omy over time be­comes more pro­nounced in terms of growth, the JP Mor­gans of this world will come. We will not beg them,” he stated.

He be­lieved that phas­ing out Nige­ria from the JP Mor­gan bond in­dex would def­i­nitely have sig­nif­i­cant down­side im­pli­ca­tions for Nige­ria, par­tic­u­larly on the for­eign ex­change mar­ket.

He said, the an­nounce­ment is ex­pected to pro­pel a mas­sive sell­off of Nige­rian in­stru­ments by for­eign in­vestors who track the bond in­dex from their port­fo­lios.

“The re­sul­tant ef­fect is that the coun­try may wit­ness sig­nif­i­cant cap­i­tal out­flows. We saw the im­pact of this some three months ago when JP Mor­gan first an­nounced their in­ten­tion be­fore ex­tend­ing it by six months to De­cem­ber, when most for­eign port­fo­lio in­vestors sold down their bond po­si­tions due to the cur­rency risk im­pli­ca­tion,” he said.

The Di­rec­tor-Gen­eral of the La­gos Cham­bers of Com­merce and In­dus­try (LCCI), Mr Muda Yusuf ad­vised that in or­der to mit­i­gate the im­pact of the JP Mor­gan ac­tion, the naira ex­change rate should be al­lowed to re­flect the fun­da­men­tals of the for­eign ex­change mar­ket.

Yusuf em­pha­sized the need for the adop­tion of a mar­ket ap­proach with a pe­ri­odic in­ter­ven­tion by the CBN as the ca­pac­ity per­mits, say­ing ”The CBN should al­low the for­eign ex­change mar­ket to func­tion with­out com­pro­mis­ing its over­sight func­tions to en­sure that the mar­ket does not be­come a plat­form for money laun­der­ing.

”The CBN should be com­pelled to en­gage with rel­e­vant eco­nomic min­istries in or­der to bring about co­her­ence in the man­age­ment of the Nige­rian econ­omy.”

CBN Gover­nor, Eme­fiele

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