JPMorgan Perfect Plans to Remove Nigeria From Emerging-Market Bond Indexes

After placing Nigeria on index watch for 9 months, JPMorgan has finally made plans to remove Nigeria from emerging-market bond indexes tracked by more than $200 billion of funds. According to JPMorgan’s statement to Bloomberg, Nigeria’s new foreign exchange measures made it hard for foreign investors to gauge the index. Hence, creating uncertainty and a drop in liquidity of the index.

Since January, the Central Bank of Nigeria has introduced several foreign exchange restrictions to contain continuous drops in the naira value amid a fall in global oil prices. In a statement made available to Thisday, signed by CBN’s Director of Corporate Communications, Mr. Ibrahim Mu’azu, the apex bank said “the market for Federal Government of Nigeria (FGN) bonds remains strong and active due to the strength and diversity of the domestic investor base”

The decisions are in accordance with national economic policy to safeguard the interest of Nigerians and the institution will continue to take economic decisions that will impact the lives of Nigerians positively, CBN stated in the press release.

Reuters yesterday reported that the removal would force various funds tracking Nigerian bonds to sell their portfolios, which will result in significant capital outflows and subsequently, lead to an increase in borrowing costs for Nigeria, Africa’s largest economy.

The removal process is in two phases, the first phase of removing Africa’s biggest economy from Government Bond Index-Emerging Markets, or GBI-EM will take place at the end of September followed by a complete exit come October, said JPMorgan, New York.

Nigeria is estimated to lose more than $3 billion to capital outflow and a significant portion of capital inflows. “The pressure will most certainly be back on the bank to allow the official naira rate to be at a slower, more sustainable level. Whether this comes with a more liberalized foreign-exchange regime is now anyone’s guess.” Gareth Brickman, a market analyst at ETM Analytics NA LLC in Stamford, Connecticut,

Currently, Nigeria’s bond is tracked by $183.8 billion of funds and weighs 1.5 percent in the biggest GBI index. JPMorgan has made it clear that Nigeria will not be eligible for re-entry for the next 12 months once delisted.