JP Morgan delist: Nigeria may lose $2.5bn
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.”