JP Morgan delisting Nigeria from Emerging Market Government Bond Index, interpreted

On September 8th 2015, the United States-based lender, JP Morgan, said Nigeria would be phased out of its Emerging Market Government Bond Index (GBI-EM) by the end of October due to alleged lack of liquidity and transparency in the nation’s foreign exchange market. This announcement comes after JP Morgan earlier in January this year, placed Nigeria on a negative index watch on its Government Bond Market Index.

JP Morgan’s relationship with Nigeria

JP Morgan Chase & Co. is an American multinational banking and financial services holding company. It is widely recognized as a global leader in capital raising, for wealthy nations and emerging markets.

Nigeria was included in the JP Morgan Emerging Market Government Bond Index (GBI-EM) in 2012, based on the existence of an active domestic market for FGN bonds. The GBI-EM indices consist of regularly traded liquid fixed-rate domestic currency government bonds. Nigeria was expected to have a 0.59% weight of the $170 billion of assets under management of the index. At the time, Nigerian bonds were offering yields of up to 16% compared to the GBI-EM Index yield of 5.8%.

What will happen to Nigeria if it is expelled from JP Morgan’s GBI-EM index?

If Nigeria is removed from the JP Morgan Index many foreign investors will be forced to sell off their Nigerian bond holdings, which is estimated to be worth about $2bn.

“There are foreign portfolio investors who knew little about investing in Nigeria but decided to invest because it is listed on the JP Morgan’s GBI-EM index” said Gregory Kronsten Associate Director Head, Macroeconomic & Fixed Income Research FBN Capital.

Delisting Nigeria would also mean that bond yields and borrowing costs will increase, negatively affecting Nigeria’s dire economy. The Naira may also face another round of major devaluation, as the economy could struggle to sustain the pace of forex outflows outside Nigeria.

“Nigeria may have to devalue its Naira again not because of JP Morgan but because that is the best option for them to remain on the JP Morgan GBI-EM Index” said Gregory.

Nigeria is already being affected by the fall in oil price because it is 75 percent dependent on oil for revenue. The reduction in oil revenue is putting pressure on the country’s foreign reserve. This means that JP Morgan is the second reason Nigeria may have to devalue its currency. Another devaluation of the Naira would mean more hardship and an increase in the cost of basic household needs such as food, electricity and fuel.

Gregory also said that Nigeria’s expulsion from JP Morgan Index will not have a negative impact on offshore people who are buying equity. This is because Nigeria is on the frontier market index for equity which is run by Morgan Stanley Capital International (MSCI) Index. “JP Morgan has Nigeria’s emerging market index while Morgan Stanley which runs the equity index has Nigeria’s frontier market which is a level lower.”

The MSCI Emerging Markets index of equities
MSCI Emerging Markets index Country’s weight for stock as of August 31st 2015

Nigeria is currently among the top five countries on the MSCI emerging frontier markets index of equities.

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