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Published On: Wed, Jan 21st, 2015

Why Nigeria must remain on the JP Morgan Emerging Market Index

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Emefiele GodwinBy Aminu Imam

It is a piece of good news that the Central Bank of Nigeria (CBN) will engage with JPMorgan to ensure that Nigerian bonds remain on its Emerging Markets Global Bond Index (GBI –EM) as a result of the recent negative watch placed on them by the New York-based global financial services firm.

The move will certainly boost investors’ confidence on the Federal Government bonds. Godwin Emefiele, Nigeria’s Central Bank Governor, told the press this week that the apex bank will be engaging with JP Morgan team to provide them with the numbers on FX liquidity, which is the bone of contention in the placing of the Nigeria bond on negative watch list in the first place by the global investment bank.

With the on-going sliding of the value of Naira against the dollar due to falling price of oil in the world, Nigeria’s mono-product economy needs to urgently diversify its bases for the funding of its infrastructural and other economic development projects. And one area that the country has turned to in recent years is the international capital market (ICM).

In 2014 Nigeria received the prestigious 2013 Best Sovereign Bond in Africa Award; it was bestowed on Nigeria by the Emerging Market, Europe, Middle East and Africa (EMEA) wing of the Citigroup; the award was a recognition of the bold steps taken by the Debt Management Office (DMO) in 2013, when it offered two Eurobonds in tenors of 5 and 10 years, each for USD500 million, which were four times oversubscribed at the time — a pointer to the confidence investors have on the Nigeria’s economy.

Nigeria has come a long way in the management of its debt portfolios through the Debt Management Office (DMO). And one of the most innovative steps was the listing of Nigeria’s bond, on the J.P. Morgan Emerging Market index in 2013. Nigeria and South African are the only two African countries on the index.

Recent price shocks at the global oil market have affected FX liquidity in the country. Daily, trading volumes for the naira have dropped just $20 million to $30 million in January, compared with about $300 million to $500 million six months ago. The Nigerian economy will be the worse for this trend, because importing goods into Nigeria would be expensive, while exports would be cheap, thereby creating room for round tripping of the foreign exchange.

In an effort to stem unhealthy speculation, in which banks resort to round tripping at the FX market, the CBN came up with two fiscal policies announced through two recent circular notices, which were, for all intent and purposes, aimed at protecting the naira.

These are the foreign exchange trading position of banks at the close of each business day and the utilization of funds purchased from the interbank foreign exchange market.

As a result of these rules, the FX market temporarily stopped trading on a two-way quote basis, which led to an incoherent price discovery process, with the exchange rates hovering all over the place and making it very difficult for banks to fulfil large client orders.

Noting the negative effects of the two fiscal policies, CBN quickly modified them on January 16th through another circular. The new circular revised the Daily Foreign Currency Trading positions from zero percent to 0.1 percent of shareholders’ funds unimpaired by losses and increased the timeline for utilization of funds to 72 hours.

The utilization deadline was moved from the date of purchase the value date. The modification effectively removes all barriers to trading Forwards, Swaps and other derivative products.

Sounding reassuring, the CBN Governor said, “We are committed to remaining on the index and know the adverse impact exclusion from the index will have on the country.”

Nigeria accounts for 1.8 percent of the $287 billion linked to the GBI – EM. The implication of removal of Nigeria from the index is that it would force funds traders to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows. This, in turn, would raise borrowing costs for country.

However, many analysts believe JP Morgan will not take such a step given the size of our economy and potential for future capital rising (?) in the debt and equity markets. Although the move by JP Morgan is to protect the interests of international investors some financial analysts see it as a bit hasty if one considers the fact that Nigeria took the recent FX measures in order to protect the fledgling Naira.

Looking back at the distance Nigeria has travelled in managing the country’s debt profile, all efforts by the Federal Government should be directed at ensuring the consolidation of the achievements of the DMO. It is public knowledge that, prior to the establishment of the DMO in 2000, public debt management was bedevilled by many issues, such as inadequate debt data recording system and poor information flow across agencies; complicated and inefficient debt service arrangements, which led to penalties that added to the debt stock, and lack of consistent well-defined borrowing policies and public debt management strategies.

Today, the DMO has continued with market-based funding of government’s financing needs which began in 2003, and has marked a turning point in domestic debt market transformation. This has involved initiatives such as tenor elongation and establishment of sovereign yield curves of 3 months to 20 years, thereby creating a market for long-term funds; streamlining and restructuring of the different types of outstanding debt instruments; and, regular issuances of Bonds, and development of active secondary market for FGN Bonds.

The DMO also worked to establish a viable competitive presence in the ICM through its debut offer of USD500 million 10-year 6.75 percent Sovereign Eurobond issued in January, 2011, which was closely followed by the successful issuance of a USD 1 billion dual-tranche bond offering, on July 2, 2013, of USD 500 million 5-year bond and USD 500 million 10-year bond at coupons of 5.125% and 6.375% p.a., respectively.

The decision to establish and promote access to the Nigerian sovereign bond in the ICM has helped to provide foreign investors with requisite market information for investment decisions; and created market benchmarks for future borrowings by the sovereign, sub-nationals and corporate bodies.

These provide reliable perspectives and credible country evidence to support foreign direct investments (FDIs).

With these achievements Nigeria has come a long way in its debt management and will be well remaining on the JP Morgan Emerging Market Index, whatever it takes.

 

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