JP Morgan index and collective self-delusion


Wednesday, September 16, 2015 9.37 AM / By Temitope Oshikoya**

Stanford University Encyclopedia of Philosophy defines “collective self-delusion” as holding of a false belief in the face of strong and contrary evidence by a group of people as a result of shared biases, desires or intentions favouring that false belief.

There is no better way than to use the term “collective self-delusion” to describe the romance and bitter divorce between fickle and speculative foreign portfolio investors on the one hand and our Monetary and previous Fiscal Authorities on the other hand.

In 2012, JP Morgan included Nigeria in its Government Bond Index-Emerging Markets (GBI-EM) when that index was yielding about 6% compared to 16% on Nigerian bonds.

There was a binge of foreign capital feast with foreign portfolio investors surging into the bond and equity markets from 15% of portfolio investment transactions in 2007 to nearly 60% in 2014.

The high-octane speculative traders wined and dined at the cocktail, where the Monetary Authorities supplied them with a menu of policies featuring incentives for short-term portfolio capital inflows with relatively low capital controls, with persistent high interest rates, and heavy intervention in the foreign exchange market.

We learnt nothing from economics trilemma principles, from the experience of Malaysia during the Asian financial crisis; and from the two largest developing economies, China and India, with capital controls, as well as Indonesia, that are not on the GBI-EM Index. China deliberately and consistently pursued a regime of limits to foreign portfolio inflows and low domestic interest rates.

More importantly, the fickle foreign portfolio traders had perceived Nigeria’s foreign reserves during the financial and economic peace time as ‘nuclear weapons,’ whose mere existence especially in relation to short-term external debts serve as deterrents and as a form of protection to them. They, at the same time, expected that the foreign reserves would be deployed as gun-powders when financial and economic crisis start to emerge (Bussière, et. al, 2014).

Indeed, as capital feast sets in, the Central Bank of Nigeria (CBN) had to draw down foreign reserves, but the gun powders were drying up too fast; thereby resulting to other tools including depreciation of the Naira by 22%, imposition of capital controls, and selected current account restrictions.

The position that the CBN now finds itself has been compounded by the erstwhile Fiscal Authorities, who presided over massive fiscal leakages, while over-hyping an economy that was being fuelled by high oil prices and consumption-led growth, devoid of sustainable productivity growth.

Furthermore, the Fiscal Authorities did not learn the lesson of history when previous oil price down cycles bottomed after 60 to 70 percent decline, implying as this writer and others have argued that oil price could fall to around $40 or less. Indeed, Dele Sobowale of Vanguard had written that “the underlying assumptions of $78 for crude oil price and N160 per dollar for the 2015 national budget exhibits the triumph of hope and self-delusion over reality and the verdicts of economic history and experience.”

As Bloomberg notes “JPMorgan Chase & Co.’s decision to exclude Nigeria from its local-currency emerging-market bond indexes tops a year of pain for a nation reeling from a collapse in oil prices, slowing growth and a lack of economic leadership. Nigeria has gone almost full circle from a favored investor destination in Africa three years ago -- because of its status as the continent’s largest crude producer and most populous nation -- to being rebuffed. “

Actually, it is Nigeria that has rebuffed and stood firm against a vast armada of foreign portfolio investors and speculators determined to ensure further capitulation and precipitous devaluation of the naira. With relatively high premium on Nigerian bonds yields and loose capital controls, they were making a killing and which explained their relentless media campaign against Nigeria.

Where do we go from here? Surely, there would be short-term liquidity constraint, equity market volatility, and rising bond yields, which are now back to 16.2% about the same as in 2012. Nigeria, however, will not collapse because JP Morgan decided to prematurely delist the country from its bond index.

Judging from the experience of China and India, it was prematurely included in the index in the first place due to over-hype of the economy by those who chose to paint pigs with lipsticks by ignoring their own economic mismanagement and the high misery index that Nigerians were experiencing in their daily lives.

Indeed, the removal of Nigeria from the index may be a blessing in disguise. The policy makers can now focus more on addressing real issues of emerging stagflation, plugging fiscal leakages, and tackling institutional constraints facing the economy. 

These are the challenges that the new administration is showing strong leadership on with the bailout funds, the treasury single account, the NNPC reforms, and reinvigoration of revenue generating agencies, but the fickle short-term speculative foreign investors are not interested in them.

What Nigeria needs are smart foreign direct investment with long-term commitment to job creation, faster inclusive economic growth and broad-based equitable prosperity.

Good riddance to bad rubbish of speculative foreign portfolio traders with their collective self-delusion.

**Dr. Temitope Oshikoya, an economist, is CEO of Nextnomics Advisory.

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