JP Morgan delivers its judgement


Wednesday, September 09, 2015 08:47AM / FBN Capital Research   

JP Morgan yesterday announced the phased removal of Nigeria from its GBI-EM indices of local currency government bonds for failing its liquidity and transparency tests. Nigeria did not offer a “fully functional two-way fx market”. The points of interest are the authorities’ response and the macro impact.

The CBN is unlikely to scramble to make good the perceived flaws in the fx market for the reason that they (the flaws) support its exchange-rate policy. Its task of holding the line would not be possible if the market was fully functional.


To make a broader point, the MPC members’ personal statements seldom now view monetary policy as a means of locking in foreign fixed income investors. This will change over time in our view as the CBN and the MPC move to a more flexible exchange-rate regime.

Ahead of the addition of Nigeria to its indices in October 2012, JP Morgan suggested that the inclusion would translate into inflows of about US$1.5bn on the assumption that its tracker investors would adjust their holdings to make the new entrant market-weight. 

These investors will have exited Nigeria by the end-October, the second and final phase of the process. This would probably leave a maximum of $1bn invested by the offshore community in all naira-denominated Nigerian government paper. FGN domestic debt amounted to N8.40trn (US$42bn) at end-June.

The same flaws in the fx market naturally apply to the offshore equities investor. However, Nigeria has a place (and the second largest weighting) in the benchmark equities index for frontier markets (MSCI), where the terms for eligibility are less taxing than those for JP Morgan’s indices for emerging markets.    

This is a demotion for Nigeria and amounts to reputational damage. Since the FGN as well as the CBN are fire-fighting in the face of the global headwinds, we do not expect a dramatic response on their part.

Nigeria is not eligible for re-inclusion in the GBI-EM indices for at least 12 months. We can assume that JP Morgan would not lightly restore Nigeria.

Nigeria was admitted to a similar but far smaller series of indices by Barclays in April 2013.

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