Nigerian bond yields spike, stocks fall after expulsion news

3.02% The decline in the stock index below 30 000 level

NIGERIAN bond yields spiked across maturities yesterday while the stock index fell sharply a day after JP Morgan said it would eject Africa’s biggest economy from its government bond index, traders said.

JP Morgan late on Tuesday said it would remove the bond listings belonging to the nation from its index by the end of October, after warning the Nigerian government that currency controls were making transactions too complicated.

The benchmark 2024 bond yield rose to 17 percent yesterday from 16.2 percent the previous day. The stock index shed 3.02 percent to fall below a 30 000 point psychological level.

Nigeria’s central bank under governor Godwin Emefiele introduced several foreign exchange trading restrictions from December to stem the drop of the naira amid weaker oil prices. The country is Africa’s largest producer of crude, which accounts for about 90 percent of exports and twothirds of government revenue.

JPMorgan placed Nigeria on index watch in January, saying the foreign exchange measures made it difficult for foreign investors to replicate the gauges.

The country would “lose a significant chunk of regular portfolio inflows”, Gareth Brickman, a market analyst at ETM Analytics NA in Connecticut, said in a note yesterday, estimating that more than $3 billion (R42bn) of Nigerian bonds would need to be sold.

“The pressure will most certainly be back on the bank to allow the official naira rate to be at a lower, more sustainable level. Whether this comes with a more liberalised foreignexchange regime is now anyone’s guess.”

Nigeria would not be eligible for re-entry for at least 12 months from the date of exclusion, JPMorgan said. The country has a 1.5 percent weighting in the biggest GBI-EM index, which is tracked by $183.8bn of funds, according to the bank.

“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,” JPMorgan said in the statement.

Traders say the removal has forced funds to sell Nigerian bonds, triggering significant capital outflows which would raise the borrowing costs for the government. It has also generated a ripple effect for stock market investors.

“You can only imagine the chaos that is unfolding here,” a regional African investment analyst said from Lagos.

“There are many more investors still in equities who are keenly watching how the central bank manages the exit process because if they even sniff the possibility that they won’t be able to get dollars in the future they are going to run for the door,” he said.

Nigeria struggling with a plunge in vital oil revenue imposed currency restrictions to defend the naira after the burning of dollar reserves failed to halt a slide.