Expert Identifies Benefits, Risks of Nigeria’s Bid to Rejoin JP Morgan Bond Index

Ndubuisi Francis in Abuja

As Nigeria makes frantic moves to rejoin the JP Morgan Bond Index, Nigeria’s first professor of capital market, Prof. Uche Uwaleke, has declared it is in the overall interest of the country to return to the index, but underscored the inherent risks.

Nigeria was removed from the index in 2015 following changes in the nation’s foreign exchange policies which were interpreted to mean a return to capital control by foreign investors.

Director General, Debt Management Office (DMO), Ms. Patience Oniha had on the sidelines of the just-ended IMF/World Bank Spring Meetings in Washington DC, US, revealed that Nigeria was at advanced discussions with JP Morgan to re-enter its Government Bond Index.

The move could signal renewed investor confidence in the country’s foreign exchange (FX) regime following a series of sweeping reforms by the Central Bank of Nigeria (CBN)

However, reacting to the renewed bid by Nigeria to rejoin the JP Morgan Bond Index, Uwaleke told THISDAY that the Nigerian economy obviously stands to benefit from the index.

According to him, rejoining the index raises the country’s credibility in the international community as membership of the JP Morgan index signals transparency and macroeconomic stability.

He said: “As a corollary to the above, it has the potential of increasing the country’s credit profile, reducing the risk premium on the country’s sovereign bonds, and, therefore, the cost of borrowing.

“Given the fact that many institutional investors rely on the JP Morgan Index for investment decisions, it is capable of boosting foreign investments in Nigeria.

“Increased foreign investments will boost external reserves and help provide the much-needed liquidity in the forex market, thereby stabilising the exchange rate.”

The former Imo State finance commissioner however noted it was important to bear in mind that rejoining the JP Morgan bond index comes with its own risks.

“There is the risk of market volatility which arises because the economy is now more linked to the global economy. So, a change in global economic conditions, such as a hike in the US interest rates, could significantly impact the Nigerian economy.

“There’s also exposure to hot money given the fact that it can have a destabilising effect on an economy when foreign portfolio investors exit. Inclusion in the JP Morgan bond index usually attracts more of Foreign Portfolio than Foreign Direct Investments.

“It can also increase currency risk in view of the temporary nature of the capital inflows.

“It also has the potential of increasing the country’s public debt. Its credit enhancement opportunity could be abused, thereby resulting in higher levels of borrowing,” the university don and Director of the Institute of Capital Market Studies, Nasarawa State University, Keffi, said.

According to him, it was also instructive to note that sustaining some of the conditions for inclusion such as market access and currency convertibility tend to strip the authorities in Nigeria the flexibility to implement fiscal and monetary policies.

“All said, I think it is in the overall interest of Nigeria to rejoin the JP Morgan bond index,” he concluded