Nigeria jp morgan delisting – in who’s interest – futures market today


Obinna Chima writes on the decision by US investment bank, JP Morgan & Chase to phase out Nigerian government bonds from its Government Bond Index for Emerging Markets and its impact on the economy

The announcement of plan by US investment bank, JP Morgan & Chase, to phase out Nigerian government bonds from its Government Bond Index for Emerging Markets (GBI-EM) by the end of October, have continued to send shivers down the spines of investors in Nigeria.

According to the investment bank, the limited transparency and the lack of a fully functional two-way FX market had given rise to uncertainty and a number of challenges for investors transacting in the Naira euro usd exchange rate. Thus, Africa’s biggest economy would be partially excluded from the index by September-end and full exit will occur in October-end.

Nigeria’s current weighting in the $200 billion index is 1.50 per cent.

Nigeria entered the GBI-EM series in October 2012 after the Central Bank of Nigeria (CBN) removed the one-year lock-in period for foreign investment in government bonds. Three bond maturities: 10.6%, 18-Mar-14, 16.0%, 29-Jun-19, and 16.39%, 27-Jan-22 were added to the index based on size and liquid as at the time of inclusion.

The GBI-EM indices consist of regularly traded liquid fixed-rate domestic currency government bonds. Nigeria was expected to have a 0.59 per cent weight of the $170 billion of assets under management of the index.

Given the premium and possibility of higher returns, the inclusion brought along with it great prospects of large capital injections into the debt market with some predicting up to $1 billion in the first few months, a report by Financial Derivatives Company Limited (FDC) stated.

However, by 2013 end, Nigeria was struggling to maintain a sufficient level of liquidity – one of the requirements for the inclusion. The currency market especially, had experienced significant blow as the over 50 per cent drop in oil prices led to 11 per cent depreciation of the naira in the last quarter of 2014. This also sparked capital outflow.

However, the central bank in December 2014, reduced banks’ net open position (NOP) to zero per cent from one per cent of shareholders’ fund, before revising it up to 0.1 per cent in January 2015 usd to kes exchange rate today. Thereafter, Nigeria was placed on the Index Watch Negative for the GBI-EM in January 2015, given what they described as lack of liquidity in the spot FX and local Treasury bond market, which challenges the ability of foreign investors to replicate the benchmark.

But in June 2015, the country was given a six-month deadline to restore liquidity, taking into account the arrival of a new administration before finally deciding earlier this week to exclude Nigerian bonds from the index

But reacting to the move by the US investment bank to delist FGN bonds from its index, the Federal Ministry of Finance, CBN and Debt Management Office (DMO) in a joint statement maintained that Nigeria and the interest of Nigerians were paramount, saying they would continue to take economic decisions that will impact positively on the lives of all citizens.

In a statement signed by CBN’s Director Corporate Communications, Mr. Ibrahim Mu’azu, on behalf of the three institutions responsible for the management of the Nigerian economy, they also said "the market for FGN Bonds remains strong and active due primarily to the strength and diversity of the domestic investor base."

Prior to listing on the GBI-EM the FGN Bonds were traded Over-the-Counter (OTC), as it is still being done today. Analysis of the bonds trading statistics indicates that the secondary performance was more active in the period prior to listing on the JP Morgan index, both in terms of value and deals volume. This implied that the secondary market for the bonds was robust with strong liquidity in the market for investors, when viewed against the total FGN Bonds outstanding each year.

Nonetheless, the gains of being listed on the JP Morgan GBI-EM include visibility of the Nigerian financial markets in the international community; accessing and raising international capital at a relatively low cost; attraction of foreign portfolio investors and the accompanying capital flows that will increase USD liquidity; among others.

India and China are also excluded from the index gauge due to what JP Morgan termed capital controls that limit access to a majority of foreign investors in those countries. Russian bonds are also going to be removed from emerging markets indexes but will remain in other JP Morgan indexes that don’t require a maximum credit rating. Malaysia Pakistan and Ukraine have been taken off the MSCI index as a result of capital restrictions as well.

According to the FDC report, Nigeria’s removal from the index will force the sale of Nigerian bonds by investors as they seek to rebalance their bond portfolios online binary converter. They also argued that it will result in significant capital outflows estimated at $2 billion as well as a rise in borrowing costs as bond yields spikes.

"With the battle to stay on the index having been lost it, there is less urgency to devalue the currency and remove forex restrictions. Further forex restrictions may even be imposed in the near term as the CBN tries to conserve foreign reserves. Nevertheless, we believe devaluation has become even more imminent considering the need to boost investor confidence in an economy heavily reliant on dwindling oil revenues.

"This, in conjunction with the announcement of the cabinet will imply economic direction and a blueprint that will in the long run restore some stability and confidence in the trading market aed to usd. There is also a legitimate fear by equity investors that the actions of JP Morgan could lead to action by the Morgan Stanley Capital International (MSCI) Index who publish widely used as benchmarks for emerging and frontier equity funds. Nigeria has a 14.6% weight on the MSCI index – the second largest," it added.

But the Chief Executive Officer of Proshare Nigeria Limited, Mr. Femi Awoyemi, aligned with the position of the federal government saying "we cannot continue making policies that satisfies foreign portfolio investors and financial institutions at the detriment of the Nigerian economy."

Awoyemi said: "The bottom line is that the economy is facing a dilemma. There is a challenge between exchange rate, interest rate and inflation and this has consequences for employment, consumption and most importantly, growth stock market futures cnbc. Under this scenario, the CBN has to do all it can to stimulate growth and I strongly believe the initiatives it (CBN) has taken so far are in order. So, let’s get our house sorted out and take wise decisions on the dilemma we face."

According to a market analyst who preferred to remain anonymous, the concern of lack of liquidity in the forex market was not genuine binary to decimal. He argued that the CBN has continued to intervene in the forex market to complement autonomous sources to meet all legitimate demands, at both the retail Dutch auction system (up to February 2015 when it was suspended) and at the interbank segments, "and has remained committed to do so in the foreseeable future."

The source added: "No foreign portfolio investor has been denied access to the forex market and neither has any been restricted from repatriating any investment proceeds, whether the principal or interest gain. The forex rate is determined freely in the market on the basis of demand and supply interactions.

"The Bank only had an forex rate policy of +/-3 per cent around the mid-point of N155.00/$1 and later N168/$1 when it was operating the RDAS window, without dictating to the interbank forex market that freely determined its forex rates, and the CBN intervening only to sale and/or buy on need basis."

But the CBN eventually closed the RDAS window following observed abuses in the system and migrated to the interbank forex market. This, according to the source, automatically eliminated the multiple exchange rates system – where the RDAS, inter-bank and BDC rates were in operation.

The BDC segment of the forex market represents a very small segment that caters for retail needs of FX users. The FX rate in the BDC segment of the market is therefore, not and cannot be a fair determination of the value of the Naira against the USD.

Besides, forex trading activities in the inter-bank market are conducted openly, using the global best-in-practice service information platforms of the Eikom Reuters Information Service and / or Bloomberg that is commonly available to the authorised dealers in the market.

As at end-June 2015, the total amount of FGN Bonds outstanding stood at N5,300.42 billion, out of which the banks and discount houses account for N1,880.40 billion (or $9.55 billion – at the FX rate of N197/$1). The component of the banks/discount houses’ holding includes a portion of investments of foreign investors in the FGN Bonds, which stood at $2.01 billion (or N395.97 billion or 7.5 per cent of the total bonds outstanding) as at end-June, 2015, down from $13.5 billion in July 2014 conversion rate usd to inr. This implied that the proportion of local investments in the outstanding FGN Bonds market was overwhelming at 92.5 per cent as at end-June, 2015.

It can therefore, be deducted that even if there is to be a complete sell-off of the portfolio of foreign investors, the local market would conveniently absorb the sales, considering the trend of demand for the instrument at the primary and secondary market.

To analysts at Ecobank Nigeria, the implications of the country’s removal would weigh heavily on the bond market, "in the light of a non-functional two-way quote FX market."

"It creates a negative effect on the prices of current bond portfolios; however, the subsequent rise in bond yields should provide a new re-entry point for investors interested in naira denominated assets, which in turn will help boost FX inflows thereby supporting the naira.

"Bond yields will rise, possibly by around 200-300 basis points, which in turn would increase pressure on the naira. This will heighten the naira volatility, with further depreciation most likely; as such we expect CBN to either increase the volume/frequency of inter-bank forex intervention or devalue the naira by another 18 per cent to $1:N230," analysts at Ecobank added.

Also, the Managing Director, Cowry Assets Management Limited, Mr. Johnson Chukwu, believes the Nigerian economy will survive the JP Morgan’s threat pound to usd conversion rate. The entire portfolio of funds that are tracking Nigerian instrument at the global bond market is about $3billion, just 1.5 per cent of the index. He explained however that $3 billion leaving the country simply means "that our reserves will be depreciated by about N28 billion."

"We now have to reinvigorate the local economy so that we can have an indigenous growth in the local economy. What the government needs to do is to drop monetary policy rates and the cash reserve ratio so that liquidity will flow into the economy. We should increase lending to local production," he added.

On their part, analysts at CSL Stockbrokers Limited noted that the central bank has the resources to prevent a major sell-off for the currency even if this entire amount is withdrawn from the Nigerian bond market.

"The fact that Nigerian policy-makers have allowed the exclusion to take place further demonstrates their commitment to holding the interbank rate at its current level of N200/$1 and we therefore expect the CBN to use reserves to meet any immediate demand for forex resulting from foreigners selling bonds futures market today. As such, we do not expect a major sell-off in the currency as a direct result of the foreigners selling bonds.

"However, the decision to remove Nigeria from the index will be negative for sentiment towards Nigerian assets and this will add to the pressure on the currency over the medium term. In order to maintain the N200/$1 level, the CBN will therefore have to tighten monetary policy further.

"Further tightening will constrain economic growth – which slowed to 2.4 per cent in second quarter 2015 – and will prove unsustainable. Therefore, a devaluation of the currency remains inevitable in our view as the market will force the authorities’ hand.

"The timing of this is difficult to predict. The exclusion decision adds to the urgency for devaluation owing to the deterioration of sentiment towards Nigerian assets. An increase in domestic borrowing costs (as interest rates rise) will also place additional pressures on already-stretched government finances," CSL Stockbrokers stated.

There is no need to panic, the banking system is sound and liquid and the CBN will continue to ensure that all legitimate demands for foreign exchange are met.

The foregoing therefore calls for the CBN and the fiscal authorities to ensure that they leverage on the political capital of goodwill and maintain the confidence of investors in Nigeria canadian dollar to us exchange rate. In addition, the central bank must ensure that it sustains its commitment to supporting the market to ensure relative price stability in forex rate to guarantee the quality of life of the majority of Nigerians, whose incomes are inflexible and are more vulnerable to adverse price changes in the system.

On their part, analysts at Afrinvest West Africa Limited noted that while JP Morgan has its criteria for countries enlisted in its indices and also has the right to delist any country that falls short of its listing requirements, the CBN has its exclusive right to ensure it achieves its primary responsibility of maintaining internal and external price stability.

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