CBN Headquarters
Obinna Chima
There are indications that the Federal Government of Nigeria (FGN) bonds will be included in the JP Morgan Government Bond Index – Emerging Markets (GBI-EM) in a phased approach, over a three-month period.
The JPMorgan’s GBI-EM indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments. The index, which was launched in June 2005 is the first global local emerging markets index.
A note made available to THISDAY Wednesday, indicated that the three month would commence from October 1 and end on December 3.
It also explained: “During each rebalance date, one third of the notional of each FGN bonds will enter the index. At this stage, the inclusion appears to cover three maturities (one of the 2014 instruments; one of the 2019 bonds and the January 2022 bonds).”
It however assumed that due to their secondary market liquidity, the April 2017 bond was omitted.
Emerging Markets Strategist, Standard Bank Plc, Mr. Samir Gadio, argued that the planned inclusion of the FGN bonds on the index was expected given that Nigeria’s secondary market bond trading volumes now almost exceed those of Egypt and Morocco and represent about 20 per cent of South Africa’s turnover in normal times.
Also, JP Morgan’s Economist and Strategist for sub-Saharan Africa, Giulia Pellegrini, said: "This is a game-changer for the Nigerian bond market. Inclusion in the index would also support the efforts of the Nigerian government to deepen the bond market.”
"It raises the visibility of the Nigerian bond market on the international scene, placing what has been so far deemed a "frontier" market a step closer to more mainstream investment destinations.”
Continuing, Gadio added: “But it was generally assumed that the inclusion would take place more in the medium term. The launch of the Primary Dealers Market Makers platform in 2006 ensured some broadly consistent trading activity in on-the-run bonds (and two-way quotes over-the-counter); on the demand side, the market has been underpinned by the relative development of the domestic banking system (despite structural issues in the late 2000s) and a nascent -and fast growing –pension fund industry.
“Of course liquidity is still not adequate in the off-the-run segment (and occasionally in on-the-run securities) and the ability to short bonds is limited, but we think the Nigerian fixed income space has reached a stage that makes it qualitatively different from many other frontier bond markets and increasingly difficult to ignore internationally.”
He also forecast that the inclusion of Nigeria’s debt instrument would contribute about 0.59 per cent to the GBI-EM index.
“This is not much in proportional terms, but may imply that at least $1 billion will come into FGN bonds, which are for example a sizeable amount compared to the free float of the March 2014, June 2019 and January 2022 instruments. “In reality, it will most likely take some time for those accounts to get custody and internal approvals to hold FGN paper, so the squeeze in supply may be somewhat delayed,” he added.