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Nigeria’s Expulsion From JPMorgan’s Bond Index Hurts Its Capital Market

Nigeria’s Expulsion From JPMorgan’s Bond Index Hurts Its Capital Market

Earlier this week Nigerian capital markets were caught by surprise after investment bank JPMorgan Chase announced its intentions to drop the West African nation from its local currency emerging markets bond index.

The Nigerian All-Share index slumped nearly three percent, while the benchmark 2024 bond yield jumped by 40 basis points to 17 percent, on Wednesday, a day after  JP Morgan excluded the country from the index, citing a shortage of liquidity in Nigerian markets due to restrictive foreign exchange trading rules the central bank introduced earlier this year.

JP Morgan’s Government Bond Index-Emerging Markets, or GBI-EM, is tracked by international fund managers with more than $200  billion under their portfolio, Bloomberg reported.

The investment firm said it will eject Nigeria from the index by the end of October, forcing fund managers to dump Nigerian bonds, something Reuters reported could raise borrowing costs in the Africa’s largest oil producing country.

JPMorgan warned Nigeria in January that it would remove it from the GBI-EM index by the end of the year if the Central Bank of Nigeria (CBN) did not restore liquidity in the foreign exchange market to allow foreign investors tracking the benchmark to transact easily.

In June, the investment bank said it had postponed the decision to expel Nigeria by six month to allow President Muhammadu Buhari to form a new government after a closely fought presidential election, which saw the first opposition victory in the country.

“As an investor it is flabbergasting that the Nigerian authorities have allowed themselves to be put in this situation,” Anders Faergemann, senior sovereign portfolio manager at PineBridge Investments, told Reuters.

CBN imposed trading restrictions to protect the naira, which has fallen more than 20 percent so far this year to an all-time low of 207 per dollar. The restrictions have however crushed liquidity in the foreign exchange market.

The currency of Africa’s biggest economy and oil producer could have fallen further were it not for the CBN restrictions, analysts reckon.

“Now that JP Morgan has removed Nigeria from the EM bond index, we think there is even less reason/urgency for the CBN to allow the naira to depreciate, and to relax the FX restrictions,” Yvonne Mhango, a senior economist at Renaissance Capital, told Financial times.