The United States-based lender, JP Morgan, on Tuesday said Nigeria would be phased out of its Government Bond Index by the end of September due to alleged lack of liquidity and transparency in the nation’s foreign exchange market.
But in a swift reaction, the Nigerian Central Bank has vehemently defended its action in rejecting the demands by the JP Morgan to tinker with the economy, which it said is to the detriment of the country’s survival.
However, JP Morgan had on January 16 placed Nigeria on a negative index watch on the Government Bond Index.
The bank, which runs the most commonly used emerging debt indexes, said it placed Nigeria on a negative index watch and would assess its place on the GBI over the few months.
The American bank had warned that currency controls by the Central Bank of Nigeria were making Nigeria’s bond market transactions too complex to meet its rules.
JPMorgan’s action could put the nation’s $31bn external reserves under threat as it may lead to further massive sell-offs of Nigerian assets by foreign portfolio investors.
The reserves are expected to deplete further as a result of this decision.
When the global plunge in oil prices hit the naira, the CBN sought initially to support it using external reserves, but had to resort to market controls as pressure persisted.
The JP Morgan index has around $210bn in assets under management benchmarked to it, supporting investor demand for the bonds it includes.
JP Morgan’s decision to phase Nigeria out of its index, which many investors track, marks the conclusion of a process initiated in January.
JP Morgan said the phase-out would take place between September 30 and October 30.
It had said earlier that to stay in the index, Nigeria would have to restore liquidity to its currency market in a way that allowed foreign investors tracking the index to transact with minimal hurdles.
Nigeria became the second African country after South Africa to be listed on the JP Morgan’s emerging government bond index in October 2012 after the CBN had removed a 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 in the index.
“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 September 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 and this was dependent upon a consistent track record of satisfying the index inclusion criteria such as a liquid currency market.
Meanwhile, the Federal Government yesterday opened up on Nigeria’s removal from JP Morgan’s bond index.
The Ministry of Finance, Central Bank of Nigeria (CBN) and the Debt Management Office (DMO) dismissed reasons offered by J. P. Morgan for removing the country from its Government Bond Index for Emerging Markets (GBI-EM).
Speaking on behalf of the federal government, CBN insisted that Nigeria rejected demands to tinker with the economy, to the detriment of the country’s survival.
CBN’s Director of Corporate Communications, Ibrahim Mu’azu said in a statement yesterday night that “the decision by J. P. Morgan to phase out Nigeria from its Government Bond Index for Emerging Markets (GBI-EM) was untenable.
“While we respect the right of the J.P. Morgan to make this decision, we would like to strongly disagree with the premise and conclusions upon which the decision rests.
Mu’azu recounted Nigeria’s strident efforts to comply with conditions set by J.P Morgan and concluded that Nigeria has done no wrong; insisting that government agencies have consistently done its best to strengthen the Nigerian financial market and enhance the country’s status as a preferred destination for investors.
“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.
“It would be recalled that Nigeria was included in 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, J.P. Morgan placed Nigeria on an Index Watch as a result of their concerns in the operations of our Foreign Exchange (FX) 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 FX Market.
“We took measures to improve the market. Despite the fact that oil prices have fallen by nearly 60 percent in one year, which should expectedly reduce the amount of liquidity in the market, the CBN ensured that all genuine and effective demands were met, especially those from foreign investors. On transparency, the CBN mandated that all FX 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 FX Window at the CBN was closed to ensure a level-playing field in the pricing of foreign exchange. It is important to note that a functional two-way FX market already exists in Nigeria.
“However, 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 fulfil genuine customer demands to pay for eligible imports and other transactions. In the light of this, we introduced an order-based, two-way FX 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, the J. P. 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. While we would continue to ensure that there is liquidity and transparency in the market, we would like to note that the market for FGN bonds remains strong and active due primarily to the strength and diversity of the domestic investor base,” he stated.
JP Morgan added Nigeria to the index in 2012 when liquidity was improving, making it the second African country after South Africa to be included.