Abuja- JP Morgan will remove Nigeria from its Government Bond Index (GBI-EM) by the end of October, the bank said on Tuesday, after warning the government of Africa's biggest economy that currency controls were making transactions too complicated.
The removal will force funds to sell Nigerian bonds, triggering potentially significant capital outflows and raising borrowing costs for the government.
Struggling with a plunge in vital oil revenue, Nigeria had imposed currency restrictions to defend the naira after the burning of dollar reserves failed to halt a slide.
The JP Morgan index tracks around $210 billion in assets under management.
Some bonds will be removed from the index by the end of September and the rest by the end of October, JP Morgan said.
The bank had warned Nigeria that to stay in the index, it would have to restore liquidity to its currency market in a way that allowed foreign investors tracking the index to conduct transactions with minimal hurdles.
Nigeria became the second African country after South Africa to be listed in JP Morgan's emerging government bond index, in October 2012, after the central bank removed a requirement that foreign investors hold government bonds for a minimum of one year before exiting.
The index added Nigeria's 2014, 2019, 2022 and 2024 bonds, giving Africa's biggest economy a weight of 1.8 percent in the index.
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"Foreign investors who track the GBI-EM series continue to face challenges and uncertainty while transacting in the naira due to the lack of a fully functional two-way FX market and limited transparency," the bank said in a note.
The central bank had to devalue the naira and pegged it at a fixed rate against the dollar, turning trading into a one-way quote currency market whose lack of transparency upset investors and businesses.
The index provider said Nigeria would not be eligible for re-inclusion in the index for a minimum of 12 months. To get back in, it would have to establish a consistent record of satisfying the index inclusion criteria, such as a liquid currency market.
Nigeria's Finance Ministry, central bank and Debt Management Office said in a statement they "strongly" disagreed with the index expulsion, saying that market liquidity was improving.