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Nigeria financial markets suffer after JP Morgan index expulsion

10 September 2015, 07:01

Lagos - The Nigeria's stocks fell on Wednesday after JP Morgan said it would eject Africa's biggest economy from its influential emerging markets bond index due to tough controls imposed to prevent a currency collapse.

In a move that came earlier in the year than expected, JP Morgan said late on Tuesday it would remove the bond listings belonging to the West African nation by the end of October, forcing fund managers to sell Nigerian bonds, which might raise the country's borrowing costs.

The decision is a blow for President Muhammadu Buhari, who has promised to diversify an oil-dependent economy hit by a slump in global crude prices but who faces criticism for not having appointed a cabinet since his inauguration on May 29.

With no finance minister in place, foreign investors have been left wondering about government policies and struggling to sell shares or bonds as the central bank adopted tough currency restrictions to halt a slide in the value of the naira.

Anders Faergemann, senior sovereign portfolio manager at PineBridge Investments, said he was surprised that Buhari had not started tackling Nigeria's economic problems more than three months into his tenure.

Also Read: SA Minister hails Nigeria economic growth

"As an investor it is flabbergasting that the Nigerian authorities have allowed themselves to be put in this situation," he said.

All Nigerian stocks listed in the MSCI frontier market index fell by more than 3 percent, while bond yields spiked across maturities.

The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, recovered some ground from earlier falls but still closed down 2.99 percent on Wednesday.

While many foreign bonds investors have exited the market since JP Morgan warned Nigeria in January and again in June that it would get kicked out of the index unless conditions improved, stocks investors were now also pondering whether to stay.

The U.S. bank had placed Nigeria on its index watch but a decision had not been expected until later this year.

"You can only imagine the chaos that is unfolding here," a regional African investment analyst said from Lagos, asking not to be named.

"There are many more investors still in equities who are keenly watching how the central bank manages the exit process because if they even sniff the possibility that they won't be able to get dollars in the future they are going to run for the door," he said.

The benchmark 2024 bond yield rose to 17 percent on Wednesday from 16.20 percent the previous day.

Nigeria's hard currency-denominated sovereign debt nudged lower across the curve, shedding around 0.2 cents, while prices of corporate dollar-debt issued by banks gained across the sector.

Diamond Bank's 2019 dollar-issue gained 1.01 cents to trade at 90.510 cents in the dollar.

Nigeria's central bank has adopted several currency restrictions to defend the naira after the use of dollar reserves failed to halt a slide.

Traders told Reuters the central bank started rationing dollars to foreign investors last week.

No cabinet

The naira has lost around 15 percent in the last year, with devaluations in November and February. Some have predicted another may be coming, but central bank governor Godwin Emefiele said in July that the currency was "appropriately priced".

Currency forwards, a derivative product used to hedge against future exchange rate moves, reflected expectations of a weaker naira with the 1-year non-deliverable forwards on Nigeria's currency rising 2.79 percent to 268.50

"The basic story is very clear the currency is too expensive ... The question now is, does the central bank devalue the currency to respond or tighten down even more on other capital measures to try and prolong the inevitable," said Arko Sen, director EMEA strategy at Bank of America Merrill Lynch.

Buhari has said he found the treasury "virtually empty", forcing him to deal with inherited problems, along with the impact of falling oil prices on Africa's top crude producer, which relies on sales for 70 percent of government revenues.

But investors and business leaders say the lack of a finance minister, and general uncertainty around the cabinet which Buhari has said will be appointed later this month, has resulted in a lack of clear policies that has hurt the economy.

Also Read: Buhari orders review of economic policies before 2016 budget

JP Morgan 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.

On Wednesday, Buhari's spokesman Femi Adesina declined to comment on JP Morgan's decision beyond a government statement issued late on Tuesday saying liquidity for financial markets was improving.

In an indication of the dire state of public finances, the head of Nigeria's sovereign wealth fund said authorities had not made any payments to the fund this year.

The last contribution to the fund, worth $1 billion, came from the previous government in 2014, said Uche Orji, Chief Executive of the Nigeria Investment Authority, which rolls out infrastructure projects and serves as a future generation fund.

"We haven't got additional funds from the government but the fund is structured in a way that it can go through hard times," he told reporters in Abuja after meeting Buhari.

- Reuters


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