February 2, 2018 /2:30 PM /Meristem Research
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.
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.
2. JP Morgan delivers its judgement
3. JP Morgan index and collective self-delusion
4. Nigeria to be included in JP Morgan index
5. CBN sells N215bn OMO T-bills to Mop up Excess Liquidity Inflows
6. CBN sells N253bn T-bills at c.10bps lower than previous Auction Rate
7. FGN Domestic Debt Service Payment Increased In Line With The Stock of Domestic Debt
8. Naira Depreciates slightly despite $210m FX intervention by the CBN
9. Decent Start to the Year for the DMO
10. Proposed USD2.5billion Eurobond Issuance in Q1 2018
11. First FGN Bond Auction for the Year Oversubscribed
12. Slight Rally on Bonds on Prospective Eurobond Issuance by the DMO
13. Summary of FGN Bond Auction Results for January 2018
14. Bond Auction clears 14bps higher, with total sale of N110bn by the DMO
15. Weak Trading Sentiments on Bonds ahead of Auction
16. Offshore Clients take profit on the 20-yr, following MPC suspension by the CBN