Taking another Shot at JP Morgan’s Index


Obinna Chima writes on the move by the federal government to return to the JP Morgan Chase & Co’s Government Bond Index for Emerging Markets and its implications on the economy

Determined to improve investor confidence in the Nigerian economy, the federal government has expressed its desire to return to the JP Morgan Chase & Co’s Government Bond Index for Emerging Markets (GBI-EM).

The Director General, Debt Management Office (DMO), Patricia Oniha, who disclosed this, also revealed plans by the federal government to commence talks with JPMorgan Chase & Co. about being reinstated on the GBI-EM.

“We would like to get back on the index,” Oniha said.

Naira securities were removed in 2015 because of foreign-currency shortages.

Daily trading volumes for the naira have risen to about $200 million from as little as $20 million three years ago, according to Standard Chartered Plc.

In addition, the introduction of the Investors’ and Exporters’ (I&E) forex window in April 2017, which allowed for transactions at market-determined rates, has helped to improve forex liquidity in the country.

In fact, reflecting strong investor confidence in Nigeria, the forex market has recorded $13 billion since the introduction of the I & E window about nine months ago. These inflows boosted foreign exchange supply and helped stabilise the exchange rate.

The market capitalisation of the Nigerian Stock Exchange (NSE) has also improved by 22.3 per cent, from N13.21 trillion on November 30, 2017, to about N15.955 trillion as of February 2, 2018,

The International Monetary Fund (IMF) forecast the Nigerian economy will expand by 2.1 per cent this year compared with 0.8 per cent in 2017, driven by the oil sector. Also, the projection from various investment banks and institutions is that the Nigerian economy would grow stronger in 2018 and there are prospects of lower interest rates.

There are also anticipation of a more stable naira to support a further slowdown in inflation from the mid-teens to between 11 and 12 per cent at the end of 2018.

These, according to Oniha, bode well for discussions on returning to the index.

“The securities trading was never the problem, it was always the foreign-currency liquidity,” which has now improved, the DMO boss added.

On her part, Finance Minister, Kemi Adeosun, said the government was focused on improving the economy, saying indexes would “naturally” return to Nigeria when they see adjustments in line with their requirements.

“JPMorgan have their own framework of how they evaluate an economy, and when they are ready, when conditions are good, they will list Nigeria again,” Adeosun said in an interview in her office in Abuja

She added: “We should just move in our own direction. What we need to do is to re-position this economy. JPMorgan or any other index will come naturally.

“My focus really is on the recovery of the economy. They will come when the macro fundamentals are right. They left because the macro fundamentals were not right.”


How it Happened 

Nigeria had entered the GBI-EM series in October 2012 after the Central Bank of Nigeria (CBN) removed the one-year lock-in period for foreign investment in government bonds. Three bond maturities: 10.6 per cent, 18-Mar-14, 16.0 per cent, 29-Jun-19, and 16.39 per cent, 27-Jan-22 were added to the index based on size and liquid as at the time of inclusion. Meanwhile, the 10.6 per cent, 18-Mar-14 maturity was replaced with 12.1493 per cent, 18-Jul-34 in 2014.

The GBI-EM indices consist of regularly traded liquid fixed-rate domestic currency government bonds. Nigeria was expected to have a 0.59 per cent weight of the $170 billion of assets under management of the index.

At the time Nigerian bonds were offering yields of up to 16 per cent compared to the GBI-EM Index yield of 5.8 per cent.

Given the premium and possibility of higher returns, the inclusion brought along with it great prospects of large capital injections into the debt market with some predicting up to $1 billion in the first few months, a report by Financial Derivatives Company Limited (FDC) had explained.

However, by 2013 end, Nigeria was struggling to maintain a sufficient level of liquidity – one of the requirements for the inclusion. The currency market especially, had experienced significant blow as the over 50 per cent drop in oil prices led to 11 per cent depreciation of the naira in the last quarter of 2014. This also sparked capital outflow.

However, the central bank in December 2014, reduced banks’ net open position (NOP) to zero per cent from one per cent of shareholders’ fund, before revising it up to 0.1 per cent in January 2015.  Thereafter, Nigeria was placed on the Index Watch Negative for the GBI-EM in January 2015, given what they described as lack of liquidity in the spot FX and local Treasury bond market, which challenges the ability of foreign investors to replicate the benchmark.

But in June 2015, the country was given a six-month deadline to restore liquidity, taking into account the arrival of a new administration before finally deciding to exclude Nigerian bonds from the index. The federal government and the CBN had protested the country’s removal from the index.


Benefits of Nigeria’s Reinstatement

To the Association of Bureaux De Change Operators of Nigeria (ABCON), the move by the federal government would bring about great benefits to the economy.

ABCON President, Alhaji Aminu Gwadabe, explained that it would strengthen the inflow of forex in the country and also boost the CBN’s chances of achieving its $60 billion foreign reserves target in 2018 in spite of any  shock that may arise in the economy.

The ABCON boss said such return would also enable Nigeria benefit from the $20 billion overseas investment planned by the US investment bank,  which will see it raise wages, hire more, and open new branches in emerging market countries.

“I want to use this opportunity to congratulate the CBN and the Federal Government on the good news of JP Morgan renewed interest on Nigerian bond market, which will enhance investor confidence in our economy.

“The CBN has brought stability in the forex market by making dollars available to genuine forex users especially at the retail-end of the market. That has ended volatility in the market and boosted the confidence of foreign investors in the local economy,” he added.

Gwadabe also praised the CBN for introducing the I&E Forex Window, which has since April 2017 attracted over $27.8 billion in turnover into the economy and brought about transparency as well as stability in the forex market.

Gwadabe noted that the country’s return to the index would enable the government access needed funds for infrastructural developments in the economy and urged the CBN to explore the opportunity in reducing the multiple exchange rates and create more confidence for foreign investors.

“It will create more opportunity for a genuine and transparent competition among forex operators and boost employment opportunities in the country as well as deepen the forex, naira and the equities markets,” he said.