Nigeria’s Re-Inclusion to the JP Morgan Index, How Feasible?

Friday, February 2, 2018 /2:30 PM /Meristem Research

Background
The JP Morgan Government Bond Index-Emerging Markets (GBI-EM) indices track local currency bonds issued by governments in emerging markets, as a result of the growth observed in the debt markets of these countries. The emerging market countries whose bonds comprised the index as at 2015 when Nigeria was excluded were Brazil, India, China, Philippines, Nigeria, Romania, Peru, Russia, Thailand, Colombia, Hungary, Malaysia, South Africa, Poland and Mexico. 

Nigeria was the second African country to be listed in this index in October 2012, after the Central Bank of Nigeria (CBN) lifted the ban of foreign investors’ holding the government bonds for a minimum of one year. 

Reasons for the Exclusion from the Index
Following the FX crisis, alongside capital control measures by the CBN in 2015, JP Morgan issued a statement on the 9th of September 2015, stating that Nigeria had been removed from the index for the following reasons; 

i) Lack of liquidity for transactions, including the cancellation of the weekly CBN Dollar auction

ii) Lack of a fully functional two-way FX market

iii) Lack of transparency in the determination of the exchange rate 

The process started on the 30th of September 2015 and lasted till 30th of October 2015. JP Morgan noted that in order to restore its spot in the index, there was a need for improved liquidity in the FX markets.

Our Opinion 

i) Lack of liquidity for transactions
The lack of liquidity for transactions has since been addressed, given the improvement in oil prices and government revenue, coupled with the introduction of the Investors’ and Exporters’ FX window in April 2017. The window has boosted liquidity, transparency and timely execution of transactions. Similarly, the apex bank re-introduced the dollar auction in February 2017, which has also increased liquidity in the FX markets. 

ii) Transparency in the determination of the exchange rate
The exchange rate at the I&E window is determined by market forces and the CBN does not intervene, but only participates as a trader. 

iii) Lack of a fully functional two-way FX market
While the I & E FX Window has increased liquidity in the FX markets to a large degree, we are skeptical as to whether the FX market can be regarded as a “fully functional two-way FX market”, given the supply driven nature of the I & E FX window. Currently, demand outweighs supply in this market, consequently, the market operators, Deposit Money Banks (DMBs) and the CBN, quote their offer prices, as the market continues to improve the liquidity. 

Given these developments, we are optimistic about the possible re-inclusion of Nigeria in the JPMorgan Government Bond Index Emerging-Markets. Subsequently, we expect funds flow into the bonds market, which should result in decline in the yield on Naira denominated assets. 

On the downside, we note that the possibility of capital flight, as a result of security threats and political uncertainties, remains a major threat to this, as 2018 is a pre-election year.  



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