Marina in the central business district of Lagos

Bamidele  Famoofo

About 20 months after JP Morgan, the largest financial services holding company in the United States and world’s fifth largest bank, delisted Nigerian bonds from its Government Bond Index-Emerging Market (GBI-EM), the managers of the second largest economy in Africa tended to wake up to their responsibilities. Nigerian economic managers moved to restore sanity to the foreign exchange market

The reasons given by JP Morgan for delisting Nigeria from its GBI-EM in October 2015, exactly three year after the country was included on the Index, was lack of liquidity and transparency in the country’s foreign exchange market.

The JP Morgan Index tracks local currency bonds issued by emerging market governments.

The announcement of Nigeria’s removal from the index resulted in foreign investors selling off their holdings of Nigeria’s bonds. Foreign holdings of Nigerian government bonds were estimated to be about $2.75 billion at the point when JP Morgan took the action.

“Foreign holdings of Nigerian government bonds stood at around $2.75 billion. They had been around $8 billion last September,” the head of Africa strategy at Standard Chartered Bank, Samir Gadio, said.

Notwithstanding the delisting and its implications on the Nigerian economy, JP Morgan said Nigeria would be eligible for re-inclusion if it could uphold the inclusion criteria for at least 12 months. This means the authorities must restore liquidity to the forex market in a way that allows foreign investors tracking the index to conduct transactions with minimum hurdle.

Nigeria has met the requirement for re-engagement, having successfully implemented the Investors and Exporters Window (I&E) in the last one year. The initiative, which was initially unpopular among Nigerians, especially experts in the financial industry, has now been described as a game changer in the Nigerian foreign exchange market.

“Nigeria’s inclusion in the GBI-EM index in October 2012 was generally seen as a big step forward in its integration with global financial markets, opening the market to new investment and raising its profile worldwide. That will now be reversed,” an economist at Exotix, Alan Cameron, had said.

Reacting to the exclusion of Nigeria Gadio said, “A potential exclusion from the GBI-EM indices would make it more difficult to attract foreign portfolio flows in the future, as Nigeria will need to rebuild its market credentials.”

But the man in the eye of the storm then, Abraham Nwankwo, the former Director-General of Debt Management Office, argued that Nigeria’s removal from the index “does not amount to a downgrade of Nigeria or FGN Bonds since JP Morgan is not a credit rating agency”.

Nwankwo added, “It does not have any impact on the quality of the FGN bonds. They remain risk-free securities that are backed by the full faith and credit of the federal government and are charged upon the general assets of Nigeria. It does not imply that the bonds are no longer liquid.”

Nwankwo also said FGN bonds were supported by an active secondary market, which allowed investors to buy or sell them on any business day.

In the last 12 months, Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, has taken the bull by the horns to consistently intervene in the Nigerian Foreign Exchange Market with the creation of Investors’ and Exporters’ FX Window.

“The purpose is to boost liquidity in the FX market and ensure timely settlement of eligible transactions,” said Director, Financial Markets Department, CBN, Dr. Alvan Ikoku, in a circular issued on April 21, 2017.

The  CBN said eligible transactions in the window included: Invisible transactions (excluding international Airlines ticket sales’ remittances), loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management services fees, consultancy fees, etc.; bills for collection and; any other trade-related payment obligations (at the instance of the customer).”

The apex bank further stated, “The supply of foreign currency to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to Naira.”

The timely intervention of the I&E window, according to economic pundits, has achieved significant benefits for the economy of Nigeria in just one year.

Emefiele, in his review of the performance of the nation’s economy in January, said the introduction of the Investors’ and Exporters’ FX Window had boosted the confidence of investors in the Nigerian economy.

The performance of the I&E window since transactions commenced on April 24, 2017 has gained recognition and confidence from foreign investors, with transaction hitting $45 billion in the third trading week of April.

According to the CBN, the inflows from foreign investors into the economy of Nigeria had boosted FX supply and helped stabilise the exchange rate.

Emefiele stated, “We have also seen the market capitalisation of our stock exchange improve by 22.3 per cent, from N13.21 trillion on 30 November 2017 to N16.15 trillion as of 19 January 2018.”

Besides boosting performance in the equities market, Emefiele noted that Nigeria’s reserves had been on the rise since the introduction of the window. The figure has since moved close to $50 billion as at the close of first quarter ended March 31, 2018.

Afrinvest Research, in its review of the performance of the economy in January, said as a result of the CBN’s implementation of the I&E window, cumulative capital importation into Nigeria as of third quarter 2017 rose 91.5 per cent on year-on-year basis to a two-year high of US$6.8 billion, while the country’s Current Account stabilised in surplus position, expanding to US$9.9 billion, annualised in nine months ended September 2017, from US$2.7 billion in the financial year ended 2016.

Analysts at Vetiva Capital Management Limited were optimistic that Nigeria could make a return into the GBI-EM before the end of the current second quarter ending June 2018. This, they observed, will be a game-changer for the fixed income market in 2018 and could potentially depress yields even further.

It would be recalled that JP Morgan stated that Nigeria would be eligible for re-inclusion if it could establish that it had upheld the inclusion criteria for at least 12 months.

Meanwhile, Morgan Stanley Capital International (MSCI) retained Nigerian equities in its index following the introduction of the I&E window.

“The Nigerian economy is already benefitting from the NAFEX, fixing through improved dollar liquidity and investor confidence, with the dark days of currency crisis looking like distant history. Should Nigeria be re-included in the JP Morgan Emerging Market Bond Index, it would provide another boost and almost bring us full circle to a pre-currency crisis period,” was how a market source who did not want his name to be mentioned, put it.