JP Morgan said it would assess Nigeria’s suitability to remain in a key emerging currency bond index it manages. This is because of a lack of liquidity in the African country’s foreign exchange and bond markets.
But central bank Governor Godwin Emefiele disputed this assertion, insisting the naira is correctly valued.
The bank, which runs the most commonly used emerging debt indexes, said it had placed Nigeria on a negative index watch and would assess its place on the Government Bond Index (GBI-EM) over the next three to five months.
Removal from the index would force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows. This in turn would raise borrowing costs for Africa’s largest economy, although analysts said they did not expect JP Morgan to take such a step.
Nigeria’s central bank on Friday denied there was any shortage of liquidity in the currency market, however.
JP Morgan added Nigeria to the widely followed index in 2012, when liquidity was improving, making it only the second African country after South Africa to be included. It added Nigeria’s 2014, 2019, 2022 and 2024 bonds, which make up 1.8 per cent of the GBI-EM Global Diversified index.
Investors have 216 billion dollars benchmarked to the GBI-EM, the most popular emerging local debt index. But the bank said the current liquidity issues made it hard for foreign investors to replicate it.
“If we are unable to verify sufficient liquidity in Nigeria’s spot FX and local treasury bond market … it will trigger a review … for removal,” JP Morgan said.
“Conversely, if liquidity improves and investors are able to transact with minimal hurdles, Nigeria will be removed from index watch negative.”
The forex and bond markets have come under pressure after the price of oil, Nigeria’s main export, plunged. In response, the central bank devalued the naira by 8 per cent last year and tightened trading rules to curb speculation.
A Nigerian currency dealer said daily forex trading had fallen to under 100 million dollars daily from around 500 million dollars four weeks ago, which he blamed on the central bank rules.
David Spegel, head of emerging debt at BNP Paribas, said: “I would be very surprised if Nigeria was ejected from the index entirely given the size of the economy and potential for future capital raising in the debt and equity markets there. Eventually the whole oil risk issue will be priced into the market and flows of capital and investment will return to Nigeria,” Spegel said.
Reacting, Emefiele said “there is no truth in the assertion by the index team that they do not see the liquidity,” Emefiele said in a phone interview on Friday from the capital, Abuja. “There’s no reason to begin to take a look at” the naira’s value after the central bank devalued the currency in November, he said.
“We are very surprised at this action by the JPMorgan index team,” Emefiele said, adding that the central bank wasn’t consulted. “We want to stay in the index and we’re doing everything to make sure we do.”
Nigeria, which depends on oil for 70 percent of government revenue and almost all export earnings, has been battered by crude prices plunging more than 50 percent since June. The rout sparked capital outflows that policy makers have tried to stem by devaluing the naira and raising interest rates to a record 13 percent. The currency weakened 11 percent over the past three months, the most among 24 African currencies tracked by Bloomberg.
‘Speculative Demand’
Patrick Burton, a spokesman for JPMorgan in London, declined to comment.
The central bank makes its next interest and exchange rate decision on Jan. 20. At its last meeting on Nov. 25, it devalued the mid-point at which it sells naira at twice-weekly auctions to 168 per dollar from 155 and widened its band to 5 percent either side of that rate, from 3 percent.
The bank last month told banks to clear foreign exchange positions daily, having previously allowed them net open positions of 1 percent of shareholder funds.
Emefiele described the open-position rule as “a moving target based on our view of the liquidity and macro situation. It’s not cast in iron.”
The central bank will “meet legitimate foreign-exchange demand in the market, not spurious or speculative demand,” he said. “When the banks are unable to, the central bank will intervene to make sure that any investor that wants to go out is able to do so freely, without any hindrance.”
The naira fell as much as 1.5 percent on Friday before the central bank’s intervention led it to rebound to 184.95 per dollar as of 10 p.m. in Lagos, a gain of 0.4 percent on the day. It still posted a weekly drop of 3.4 percent, the biggest in two months.
