JP Morgan has announced the exclusion of Nigeria from the Government Bond Index-Emerging Markets (GBI-EM).
This exclusion has reportedly come as a consequence of Nigeria’s illiquid forex market as the country was placed on a watch list from January this year. This included lack of liquidity for transactions, lack of transparency in the determination of the exchange rate and lack of a fully functional two-way FX Market.
This followed a series of administrative measures rolled out by the Nigerian Central Bank to stabilise the naira.
“Exclusion from the GBI-EM Global Diversified index, GBI-EM Diversified index and the GBI-EM Broad Diversified Index implies about $3.22 billion is at risk of leaving the country’s bond market given holdings of Nigeria’s bonds relative to the overall index as at August 31st, 2015,” according to the ARM economic research.
The Nigerian Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN), and the Debt Management Office (DMO) has responded to the exclusion saying while they respect JP Morgan, they “strongly disagree with the premise and conclusions upon which the decision rests”.
In trying to unpack this exclusion, Bayo Omogoroye, who is a Chief Dealer at GT Bank said, “On transparency and liquidity there is another different market, you only buy or sell if you have a client request, maybe to JP Morgan, that’s not the market. Maybe the market is where people can trade and prices are decided on the force of demand and supply.”
In contrast, Omogoroye said the central bank is not ruled by that force of demand because to them liquidity is a concern. “If supply of forex in the market is not very strong, the rates have a way of going completely out of hand.”
Omogoroye reconciles that, “the two of them probably have the best interests of the country at heart but come from different sides.”
Soji Solanke, Head of Research at Nigerian Renaissance Capital, said his views regarding this matter are “mixed”. “The presumption was the eventual kick-off when it would happen was going to happen by year-in, I guess the fast-tracking of that decision is what caught markets by surprise.”
Solanke said these restrictions could just be on forex (FX) markets because there other issues that the economy is currently facing. Solanke tabled that the country can be kept stable, but then the economy suffers.
Nigeria’s response to the exclusion further said, despite oil prices that plummeted by 60 per cent this year, the CBN ensured that all genuine and effective demand were met, especially those from foreign investors.