Nigeria's stocks sunk on Wednesday after JP Morgan said it would eject Africa's biggest economy from its influential emerging markets bond index due to tough controls imposed to prevent a currency collapse.
In a move that came earlier in the year than expected, JP Morgan said late on Tuesday it would remove the bond listings belonging to the West African nation by the end of October, forcing fund managers to sell Nigerian bonds, which might raise the country's borrowing costs.
The decision is a blow to President Muhammadu Buhari, who has promised to diversify an oil-dependent economy hit by a slump in global crude prices but who faces criticism for not having appointed a cabinet since his inauguration on May 29.
With no finance minister in place, foreign investors have been left wondering about government policies and struggling to sell shares or bonds as the central bank adopted tough currency restrictions to halt a slide of the naira.
Anders Faergemann, senior sovereign portfolio manager at PineBridge Investments, said he was surprised that Buhari had not started tackling the country's economic problems more than three months into his tenure.
"As an investor it is flabbergasting that the Nigerian authorities have allowed themselves to be put in this situation," he said.
All Nigerian stocks listed in the MSCI frontier market index fell by more than 3 percent, while bond yields spiked across maturities.
While many foreign bonds investors have exited the market since JP Morgan warned Nigeria in January and again in June that it would get kicked out of the index unless conditions improved, stocks investors were now also pondering whether to stay.
The U.S. bank had placed Nigeria on its index watch but a decision had not been expected until later this year.
"You can only imagine the chaos that is unfolding here," a regional African investment analyst said from Lagos, asking not to be named.
"There are many more investors still in equities who are keenly watching how the central bank manages the exit process because if they even sniff the possibility that they won't be able to get dollars in the future they are going to run for the door," he said.
The benchmark 2024 bond yield rose to 17 percent on Wednesday from 16.20 percent previous day. The stock index shed 3.02 percent to fall below a 30,000 point psychological level.
Meanwhile, FBN Holdings was the top decliner on the MSCI frontier market index, down 5.15 percent, followed by Guinness Nigeria, by 5 percent, and Dangote Cement and Guaranty Trust Bank, which were both down by 4.98 percent.
Nigeria's central bank has adopted several currency restrictions to defend the naira after the use of dollar reserves failed to halt a slide. Traders told Reuters the central bank started rationing dollars to foreign investors last week.
The naira has lost around 15 percent in the last year, with devaluations in November and February. Some have predicted another may be coming, but central bank governor Godwin Emefiele said in July that the currency was "appropriately priced".
"The basic story is very clear the currency is too expensive ... the question now is does the central bank devalue the currency to respond, or tighten down even more on other capital measures to try and prolong the inevitable," said Arko Sen, director EMEA strategy at Bank of America Merrill Lynch.
Buhari has said he found the treasury "virtually empty", forcing him to deal with inherited problems, along with the impact of falling oil prices on Africa's top crude producer, which relies on sales for 70 percent of government revenues.
But investors and business leaders say the lack of a finance minister, and general uncertainty around the cabinet which Buhari has said will be appointed later this month, has resulted in a lack of clear policies that has hurt the economy.
On Wednesday, Buhari's spokesman Femi Adesina declined to comment on JP Morgan's decision beyond a government statement issued late on Tuesday saying liquidity for financial markets was improving.
JP Morgan had warned Nigeria that to stay in the index, it would have to restore liquidity to its currency market in a way that allowed foreign investors tracking the index to conduct transactions with minimal hurdles.